Question

Impact of a Discount

Berol Corporation sold 20-year bonds on January 1, 2017. The face value of the bonds was $100,000, and they carry a 9% stated rate of interest, which is paid on December 31 of every year. Berol received $95,350 in return for the issuance of the bonds when the market rate was 10%. Any premium or discount is amortized using the effective interest method.

1. How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item.

1.5. Prepare a proper balance sheet presentation for January 1, 2017.

2. Identify and analyze the effect of the payment of interest on December 31, 2017.

- Activity

- Accounts

- Statement (s)

2.5 How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item. Round the amounts to the nearest whole dollar.

2.6. Prepare a proper balance sheet presentation for December 31, 2017.

3. Why it was necessary for Berol to issue the bonds for only $95,350 rather than $100,000?

Because the (CHOOSE ONE - CONTRA INTEREST RATE/ MARKET RATE) of interest was greater than the (CHOOSE ONE - CONTRA INTEREST RATE/ MARKET RATE) the issuance price will have to be lower than the face value.

Answer 1

1.

2.

3.

Because, market rate of interest was greater than the contra interest rate.