P 22-10B (LO4) <?xml:namespace prefix = o ns = \"urn:schemas-microsoft-com:offic
ID: 2372963 • Letter: P
Question
P 22-10B (LO4)<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
<?xml:namespace prefix = v ns = "urn:schemas-microsoft-com:vml" /> 2. Carrying value, Sept. 30, Year 2: $579,600
BONDS ISSUED AT A DISCOUNT Brandon, Inc., issued the following bonds at a discount:
REQUIRED
1. Prepare journal entries for:
(a) Issuance of the bonds at a discount.
(b) Interest payment and discount amortization on the bonds on September 30, 20-1.
(c) Year-end adjustment on the bonds for 20-1.
(d) Reversing entry for the beginning of 20-2.
(e) Interest payments and discount amortization on the bonds for 20-2 (March 31 and September 30).
2. Calculate the carrying value of the bonds on September 30, 20-2.
Explanation / Answer
When they say that it was issued at 86, that means that the price they received was 86% of the face value of the bond. 86% of $560,000 is $481,600. The reason why they received less than face value for the bonds is that they are paying 7% on this bond, while the market rate of interest is 10%.
Since they only received, $481,600, and the face value is $560,000, the difference of $78,400 is the bond issue discount. That amount is recorded as a contra liability and shown against the $560,000 credit balance for the bonds in the balance sheet.
So at the time of issuance, the net value of the bonds on the balance sheet is $481,600.
The $78,400 is then amortized over the 12-year lifetime of the bond.
If they use the straight line method to amortize the discount, then ($78,400 / 24 =) $3,266.67 will be recorded as additional interest during each semi annual interest payment.
Each semi annual interest payment would be recorded as:
Debit Interest Expense $22,866.67
Credit Cash $19,600 ($560,000 X .07 / 2)
Credit Bond Discount $3,266.67
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