On January 1, 2014, Clearwater Corporation sold a $756,000, 9 percent bond issue

Question

On January 1, 2014, Clearwater Corporation sold a $756,000, 9 percent bond issue (10 percent market rate). The bonds were dated January 1, 2014, pay interest each December 31, and mature in 8 years. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.) Prepare the journal entry to record the interest payment on December 31, 2014. Use straight-line amortization. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) Show how the interest expense and the bonds payable should be reported on the December 31, 2014, annual financial statements. (Amounts to be deducted should be indicated by a minus sign.)

Explanation / Answer

Answer: Vlaue of bond=68040*PVIFA(10%,8)+756000*PVIF(10%,8)

=68040*5.3349+756000*0.4665

=362986.596+352674

=715661

Issuance of bonds journal entry:

Cash A/C Dr. $715661

Discount on bonds payable A/C Dr. $40339

       To Bonds Payable A/C                              $756000

The journal entry to record the interest payment on December 31, 2014.

Interest expense A/C Dr. $73082

     To Discount on bonds payable A/C                   $5042

      To cash A/C                                                       $68040

The interest expense and the bonds payable should be reported on the December 31, 2014, annual financial statements.

Income statement: Interest expense 73082 Balance Sheet: Long term liabilities Bonds Payable 756000 Less: Unamortized discount 35297 Carrying valaue of the bond 720703

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