Question

Brief Exercise 9-56 Bonds Issued at a Discount (Effective Interest) Crafty Corporation received $472,088 of cash upon issuance of 500 $1,000 par value bonds. Each bond has a stated rate of 5% and will mature on December 31, 2026, 7 years after the issuance of the bonds. Interest is paid annually on December 31. The market rate of interest is 6%. Required: Prepare the journal entry for December 31, 2022. If required, round amounts to the nearest whole dollar. 2022 Dec. 31 (Record interest expense.) Prepare the journal entry for December 31, 2023. If required, round amounts to the nearest whole dollar. 2023 Dec. 31 (Record interest expense.)

Answer 1

Solution

Date	Account Title and Explanation	Debit	Credit
December 31 2022	Bond interest expense	$ 28,736
	Discount on bonds payable		$ 3,736
	Cash		$ 25,000
	(Interest on bond paid and Discount amortized)
December 31, 2023	Bond interest expense	$ 28,960
	Discount on bonds payable		$ 3,960
	Cash		$ 25,000
	(Interest on bond paid and Discount amortized)

Working

Year end	Cash paid	Interest expense	Change in carrying value	Carrying value
				$ 472,088
2,020	$ 25,000	$ 28,325	$ 3,325	$ 475,413
2,021	$ 25,000	$ 28,525	$ 3,525	$ 478,938
2,022	$ 25,000	$ 28,736	$ 3,736	$ 482,674
2,023	$ 25,000	$ 28,960	$ 3,960	$ 486,635
2,024	$ 25,000	$ 29,198	$ 4,198	$ 490,833
2,025	$ 25,000	$ 29,450	$ 4,450	$ 495,283
2,026	$ 25,000	$ 29,717	$ 4,717	$ 500,000