Question

Claire Corporation is planning to issue bonds with a face value of $100,000 and a coupon rate of 8 percent. The bonds mature in two years and pay interest quarterly every March 31, June 30, September 30, and December 31. All of the bonds were sold on January 1 of this year. Claire uses the effective-interest amortization method and also uses a discount account. Assume an annual market rate of interest of 12 percent. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.)

1. Provide the journal entry to record the issuance of the bonds. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your final answers to nearest whole dollar amount.)

No	Date	General Journal	Debit	Credit
1	January 01

2. Provide the journal entry to record the interest payment on March 31, June 30, September 30, and December 31 of this year.

No	Date	General Journal	Debit	Credit
1	March 31
2	June 30
3	September 30
4	December 31

3. What bonds payable amount will Claire report on this year's December 31 balance sheet? (Round your final answers to nearest whole dollar amount.)

Bonds Payable:

Answer 1

1) Journal entry :-

Date	Particulars	Debit ($)	Credit ($)
Jan 1	Cash (Working Note 1) A/c Dr.	92980
	Discount on bonds payable A/c Dr.	7020
	To Bonds Payable		100000

Working Note 1 :-

Particulars	Amount ($)	Present Value factor@3%	Present Value
Interest on Bonds
(100000 * 8% * (1/4))	2000	7.01969	14039
Principal Value	100000	0.78941	78941
Total			92980

2).Journal Entries of Interest Expense and Amortization.

Date	Particulars	Debit ($)	Credit ($)
Mar 31	Interest Expense A/c Dr.	2789
	To Cash		2000
	To Discount on bonds payable		789
June 30	Interest Expense A/c Dr.	2813
	To Cash		2000
	To Discount on bonds payable		813
Sep. 30	Interest Exxpense A/c Dr.	2837
	To Cash		2000
	To Discount on bonds payable		837
Dec 31	Interest Expense A/c Dr.	2837
	To Cash		2000
	To Discount on bonds payable		863

Working Note 2 :-

Date	Coupon Interest (A)	Market interest (B)	Discount to be amortized (C)	Carring Value (D)
	($100000*8%*(1/4))	(Carrying Value*12%*(1/4))	C = B - A	(D = Previous year + C)
jan 1				$92980
Mar 31	$2000	$2789	$789	$93769
jun 30	$2000	$2813	$813	$94582
Sep 30	$2000	2837	$837	$95420
dec 31	$2000	2863	$863	$96283

3). The bonds payable reported in balance sheet as on 31 Dec.

Bonds Payable = $96283