Question

Required information P10-8 (Static) (Chapter Supplement) Recording and Reporting a Bond Issued at a Discount (without Discount Account) LO10-4 [The following information applies to the questions displayed below.) 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 does not use a discount account. Assume an annual market rate of interest of 12 percent. (EV of $1. PV of $1. EVA of $1. and PVA of $1 (Use the appropriate factor(s) from the tables provided.) P10-8 Part 2 2. Provide the journal entry to record the interest payment on March 31, June 30, September 30, and December 31 of this year. (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.) View transaction list

Answer 1

Solution Face value of Bonds Coupon rate of interest Market rate of interest Interest payment frequency Bonds maturity period/Bonds life Total no. of coupon payments till maturity (2 Years x 4) $100,000 8.00% 12.00% Quarterly 2 years Quarterly interest payment = Face value x Coupon rate of interest/4 = $100,000 x 8%/4 = $2,000 Since, the market rate of interest is higher than the coupon rate of interest, the investor shall not be willing to pay the face value to buy these bonds; hence these bonds shall be issued at discount. Step-1: Computation of issue price of bonds Quartely interest payment Present value of an ordinary annuity of $1 for 8 periods at 3% Present value of Quarterly interest payments ($2,000 x 7.01969) $2,000 7.01969 $14,039 Face value of bonds to be repaid at the time of maturity Present value of $1 for 8 quarterly periods at 3% Present value of payment made on maturity ($100,000 x 0.78941) $100,000 0.78941 $78,941 Issue price of Bonds $92,980 Note: Since, the interest payment is quarterly, hence the period shall be multiplied by 4 (2 years x 4 quarter), and the interest rate shall be 1/4 (12%/4) to select/calculate the present value factor. Present value of an ordinary annuity of 1 for 8 periods at 3% can be calculated as under: Present value annuity factor (Excel formula) PV(12%/4,2*4,-1,,0) = 7.01969 Present value of 1 for 8 periods at 3% can be calculated as under: Present value factor (Excel formula) = 1/(1 + 12%/4)^(2*4) = 0.78941 Issue price of bonds $92,980

Step-2: Bond discount amortization table Date Cash Payment Interest Expense Increase in Carrying Value Carrying Value Jan. 01, Year 1 Mar. 31, Year 1 June 30, Year 1 Sep 30, Year 1 Dec. 31, Year 11 Mar. 31, Year 2 June 30, Year 2 Sep 30, Year 2 Dec. 31, Year 2 $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 $2,789 $2,813 $2,837 $2,863 $2,888 $2,915 $2,943 $2,972 $7891 $813 $837 $863 $888 $915 $943 $972 $92,980 $93,769 $94,582 $95,419 $96,282 $97,170 $98,085 $99,028 $100,000 Step-3: Record Journal Entry Credit Date March 31 Debit $2,789 General Journal Interest Expense Bonds Payable Cash To record the interest payment on March 31) $789 $2.000 Credit Date June 30 Debit $2,813 General Journal Interest Expense Bonds Payable Cash (To record the interest payment on June 30) $813 $2,000 | Date September 30 Debit $2,837 Credit General Journal Interest Expense Bonds Payable Cash (To record the interest payment on Sep. 30) $837 $2.000 Credit Debit $2,863 Date General Journal December 31 Interest Expense Bonds Payable Cash |(To record the interest payment on Dec. 31) $863 $2,000