Question

# On January 1, 2016, Knorr Corporation issued \$1,000,000 of 9%, 5-year bonds dated January 1, 2016....

On January 1, 2016, Knorr Corporation issued \$1,000,000 of 9%, 5-year bonds dated January 1, 2016. The bonds pay interest annually on December 31. The bonds were issued to yield 10%. Bond issue costs associated with the bonds totaled \$18,000. Required: Prepare the journal entries to record the following: January 1, 2016 Sold the bonds at an effective rate of 10% December 31, 2016 First interest payment using the effective interest method December 31, 2016 Amortization of bond issue costs using the straight-line method December 31, 2017 Second interest payment using the effective interest method December 31, 2017 Amortization of bond issue costs using the straight-line method

GIVEN DATA:

Knorr Corporation issued = 1,000,000

Interest = 9% and 5 years bond

December 31. The bonds were issued = 10%.

Total bonds = 18000

REQUIRED:

Prepare the journal entries ?

SOLUTION :

Annual interest = 9%

Annual market rate interest = 10%

1. calculation on annual interest bond :

interest = 100000 *9%

= 100000 *9/100

= 10000 * 9

= 90000\$

2. Numbers of periods are = 5

Working note:

PVIF(2) : cumalative factor of 5 periods @10%(90000) =3.7908

present value factor of 5 period @10%(100000) = 0.6209

THERE FORE AMOUNT RECEIVED ON THE BOND IS 962072\$

JOURNAL ENTRIES:

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