Berol Corporation sold 20-year bonds on January 1, 2012. The face value of the b
ID: 2463178 • Letter: B
Question
Berol Corporation sold 20-year bonds on January 1, 2012. The face value of the bonds was $100,000, and they carry a 9% stated rate of interest, which is paid on December 31 of every year. Berol received $91,526 in return for the issuance of the bonds when the market rate was 10%. Any premium or discount is amortized using the straight-line interest method.
Required
Prepare the journal entry to record the sale of the bonds on January 1, 2012, and the proper balance sheet presentation on this date.
Prepare the journal entry to record interest expense on December 31, 2012, and the proper balance sheet presentation on this date.
Explain why it was necessary for Berol to issue the bonds for only $91,526 rather than $100,000
Explanation / Answer
Answer:
Jan 1, 2012 Cash Dr..91526
Discount on bonds payable Dr. 8474
To bonds payable....................................100000
(to record issuance of bond)
Balance sheet
Income statement
Assets
=
Liabilities
+
Stockholder’s Equity
+
Revenue
-
Expenses
Cash 91526
Bonds payable 100000
Discount on bonds payable (8474)
Bonds payable = 100000
Less: discount on bonds payable = 8474
Net value = 91526
Answer:2
Dec. 31 Interest Expense Dr. 9153
To cash (100000*0.09).....................9000
To discount on bonds payable...........153
(to record payment of interest and amortization of discount)
Balance sheet
Income statement
Assets
=
Liabilities
+
Stockholder’s Equity
+
Revenue
-
Expenses
Cash (9000)*
Discount on bonds payable 153
Interest expense (9153)**
*100000*9%*1 year = 9000
**91526*10%*1 year = 9153
Bonds payable = 100000
Less: discount on bonds payable= 8321*
Net value = 91679
*8474 – 153 = 8321
Answer:3
The market rate of interest was greater than the interest rate that Berol corporation is paying. Therefore, the issuance price, discounted at 10%, the market rate, will be less than the face value.
Balance sheet
Income statement
Assets
=
Liabilities
+
Stockholder’s Equity
+
Revenue
-
Expenses
Cash 91526
Bonds payable 100000
Discount on bonds payable (8474)
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