Question

Lauren Corporation authorized a $2,000,000, 10-year, 8% bond issue dated January 1, 2018, with semi-interest to...

Lauren Corporation authorized a $2,000,000, 10-year, 8% bond issue dated January 1, 2018, with semi-interest to be paid each December 3 On January 1, 2018, the bonds were issued for $2,294,000 to yield a market interest rate of 6%.

Required (10 points):

  1. Were the bonds sold at par, at a discount, or at a premium?
  2. Prepare the entry to record the issuance of the bonds.
  3. Prepare the entry to record the interest payment on December 31, 2018, assuming the effective-interest amortization.
  4. What is the carrying value or book value of the bonds on December 31, 2018?

Show a step-by-step solution in a structured manner. Please

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Homework Answers

Answer #1

Face Value of Bonds = $2,000,000
Issue Value of Bonds = $2,294,000

Premium on Bonds = Issue Value of Bonds - Face Value of Bonds
Premium on Bonds = $2,294,000 - $2,000,000
Premium on Bonds = $294,000

Annual Coupon Rate = 8%
Annual Coupon = 8% * $2,000,000
Annual Coupon = $160,000

Annual Interest Rate = 6%

Answer a.

The issue value of bonds is higher than the face value of bonds; therefore, the bonds are issued at premium.

Answer b.

Answer c.

Answer d.

Carrying Value = Issue Value - Premium Amortized
Carrying Value = $2,294,000 - $22,360
Carrying Value = $2,271,640

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