Question

In: Finance

On January 1, 2021, Charles, Inc., issued 12% bonds with a face amount of $17 million....


On January 1, 2021, Charles, Inc., issued 12% bonds with a face amount of $17 million. The bonds were priced at $14 million to yield 14%. Interest is paid semiannually on June 30 and December 31. Charles’s fiscal year ends September 30.
Required:
1. What amount(s) related to the bonds would Charles report in its balance sheet at September 30, 2021?
2. What amount(s) related to the bonds would Charles report in its income statement for the year ended September 30, 2021?
3. What amount(s) related to the bonds would Charles report in its statement of cash flows for the year ended September 30, 2021? In which section(s) should the amount(s) appear?

Solutions

Expert Solution

Note:Discount on Bond payable is amortized using effective interest rate method
Period Cash interest paid = par value * semiannual coupon rate Interest expense = carrying value*semiannual Yield rate discount amortized = cash interest paid-Interest expense carrying value of discount on bonds payable carrying value of bond = carrying value of bond+discount amortized
Jan 1 2021 3000000 14000000
June 30 2021 1020000 980000 40000 2960000 14040000
Sep 30 2021 510000 491400 18600 2941400 14058600
Par value of bond 17000000
less discount on bond payable 2941400
carrying value of bond payable net of discount on bond payable 14058600
Amount of interest expense to be reported on income statement 980000+491400 1471400
amount of Interest paid as cash outflow 1020000 1020000
It would be recorded in the cash flow from operating activities

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