Question

Claire Corporation is planning to issue bonds with a face value of $240,000 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.

Required:
a. Provide the journal entry to record the issuance of the bonds.
b. Provide the journal entry to record the interest payment on March 31, June 30, September 30, and December 31 of this year.
c. What bonds payable amount will Claire report on this year’s December 31 balance sheet?

Answer 1

Answer:

a) issue price

PV of face value = $240,000 / (1 + 3%)⁸ = $189,458

PV of coupon payments = $4,800 x 7.0197 (PV annuity factor, 3%, 8 periods) = $33,695

market price = $223,153

January 1, bonds issued at a discount

Dr Cash 223,153

Dr Discount on bonds payable 16,847

    Cr Bonds payable 240,000

b) discount amortization = ($223,153 x 3%) - $4,800 = $1,895

discount amortization = ($225,048 x 3%) - $4,800 = $1,951

discount amortization = ($226,999 x 3%) - $4,800 = $2,010

discount amortization = ($229,009 x 3%) - $4,800 = $2,070

March 31, first coupon payment

Dr Interest expense 6,695

    Cr Cash 4,800

    Cr Discount on bonds payable 1,895

June 30, second coupon payment

Dr Interest expense 6,751

    Cr Cash 4,800

    Cr Discount on bonds payable 1,951

September 30, third coupon payment

Dr Interest expense 6,810

    Cr Cash 4,800

    Cr Discount on bonds payable 2,010

December 31, fourth coupon payment

Dr Interest expense 6,870

    Cr Cash 4,800

    Cr Discount on bonds payable 2,070

c) bonds' carrying value at December 31 = $231,169