Question

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?

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