Question

On January 1 of this year, Clearwater Corporation sold bonds with a face value of $751,000...

On January 1 of this year, Clearwater Corporation sold bonds with a face value of $751,000 and a coupon rate of 7 percent. The bonds mature in 10 years and pay interest annually every December 31. Clearwater uses the straight-line amortization method and also uses a discount account. Assume an annual market rate of interest of 8 percent. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Round your final answer to whole dollars.)

Required:

1. Prepare the journal entry to record the issuance of the bonds. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

2. Prepare the journal entry to record the interest payment on December 31 of this year. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

3. How will the bonds be reported on Clearwater's December 31 Balance Sheet?

Homework Answers

Answer #1

SOLUTION

Calculation of issue price-

i= 8%, n= 10

Particulars Amount ($) PV Factor Present value ($)
Principle 751,000 0.46319 347,856
Interest (751,000*7%) 52,570 6.71008 352,749
Issue price 700,605

Journal entries-

S.No. Date Accounts titles and Explanation Debit ($) Credit ($)
1. Jan.1 Cash 700,605
Discount on bonds payable 50,395
Bonds payable 751,000
(To record issuance of bonds)
2. Dec.31 Interest expense 57,609
  Discount on bonds payable (50,395/10) 5,039
Cash (751,000*7%) 52,570
(To record interest expense)

3. Balance sheet-

Amount ($)
Bonds payable 751,000
Discount on bonds (50,395-5,039) (45,356)
705,644
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