Question

8. On January 1, Year One, Gijulka Corporation offers to issue a $100,000 bond coming due in exactly ten years. This bond pays a stated cash interest rate of 6 percent per year on December 31. A buyer is found. After some negotiations, the parties agree on an effective annual yield rate of 7 percent. Consequently, the bond is issued for $92,974. The effective rate method is applied. a. What figures will be reported for this bond in Gijulka’s Year One financial statements? b. What figures will be reported for this bond in Gijulka’s Year Two financial statements

Answer 1

Bond Discount Amortization Schedule
Year	Interest Paid - $100,000 X 6%	Interest Expense - Preceeding Bond Carrying Value X 7%	Discount Amortization	Unamortized Discount	Bonds Carrying Amount
	A	B	C = B-A	D = D - C	E = $100,000 - D
0	-	-	-	7,026	92,974
1	6,000	6,508	508	6,518	93,482
2	6,000	6,544	544	5,974	94,026
Answer a & b.
		Year 1	Year 2
Income Statement
Interest Expense		6,508	6,544
Balance Sheet
Bonds Payable		100,000	100,000
Less: Discount on issue of Bonds		6,518	5,974
Bonds Payable (Net)		93,482	94,026