On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. T
ID: 2557642 • Letter: O
Question
On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at 96 resulting in a 4% discount. They had a 20-year term and a stated rate of interest of 7%.Which of the following shows how the bond issue will affect Residence’s financial statements on January 1, Year 1?
B. Option b
C. Option c
D. Option d
Balance Sheet Income Statement Statement of Cash Flows Assets = Carrying Value Bond Liability + Equity Rev. ? Exp. = Net Inc. A. 50,000 = 48,000 + 2,000 NA ? NA = NA 48,000 FA B. 48,000 = 48,000 + NA NA ? NA = NA 48,000 FA C. 52,000 = 52,000 + NA NA ? NA = NA 52,000 FA D. 50,000 = 52,000 + NA NA ? NA = NA 50,000 FAExplanation / Answer
Solution:
Bond issued at discount of 4%, therefore net proceed from issue of bond = $50,000 * 96% = $48,000
Therefore Assets will incrased by $48,000 and carrying value of bond liability will be $48,000 ($50,000 - $2000 - Unamortized discount on bond). Further in statement cash flow, proceed from bond issue will be shown in financing activities by $48,000
Hence Option B is showing correct effect on financial statment of bond issue.