Claire Corporation is planning to issue bonds with a face value of $230,000 and
ID: 2562264 • Letter: C
Question
Claire Corporation is planning to issue bonds with a face value of $230,000 and a coupon rate of 6 percent. The bonds mature in two years and pay interest quarterly every March 31, June 30, September 30, and December 31. All of the bonds were sold on January 1 of this year. Claire uses the effective-interest 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.)
1. Provide the journal entry to record the issuance of the bonds.
2. Provide the journal entry to record the interest payment on March 31, June 30, September 30, and December 31 of this year.
3. What bonds payable amount will Claire report on this year’s December 31 balance sheet?
Explanation / Answer
1.
Issue price of bond = Present value of coupon payments + Present value of face value of bond
Quarterly coupon amount = $230,000 * 6% * ¼ = $3,450
Number of quarterly coupon payments = 2 years * 4 = 8
Quarterly market interest rate = 8%/4 = 2% = 0.02
Present value of annuity = Annuity*{1-(1+r)-n}/r
Present value of quarterly coupon payments = $3,450*(1-1.02-8)/0.02 = $25,272.91
Present value of face value of bond = $230,000/1.028 = $196,302.79
Issue price of bond = $25,272.91 + $196,302.79 = $221,575.70
Date
Account titles and explanation
Debit
Credit
January 1
Cash
$ 221,575.90
Discount on issue of bonds
$ 8,424.10
Bonds payable
$ 230,000.00
(To record issue of bonds at discount)
2.
Interest expense = Carrying amount of bond * Market interest rate
Carrying amount of bond = Issue price + Discount amortized till date of interest payment
Date
Account titles and explanation
Debit
Credit
March 31
Interest expense ($221,575.90*2%)
$ 4,431.52
Discount on issue of bonds
$ 981.52
Cash ($230,000*6%*1/4)
$ 3,450.00
(To record payment of interest)
June 30
Interest expense (($221,575.90+$981.52)*2%)
$ 4,451.15
Discount on issue of bonds
$ 1,001.15
Cash ($230,000*6%*1/4)
$ 3,450.00
(To record payment of interest)
September 30
Interest expense (($221,575.90+$981.52+$1001.15)*2%
$ 4,471.17
Discount on issue of bonds
$ 1,021.17
Cash ($230,000*6%*1/4)
$ 3,450.00
(To record payment of interest)
December 31
Interest expense (($221,575.90+$981.52+$1001.15+$1021.17)*2%
$ 4,491.59
Discount on issue of bonds
$ 1,041.59
Cash ($230,000*6%*1/4)
$ 3,450.00
(To record payment of interest)
3.
Bond payable as on December 31 = $221,575.90+$981.52+$1,001.15+$1,021.17 + $1,041.59 = $225,621.33
Date
Account titles and explanation
Debit
Credit
January 1
Cash
$ 221,575.90
Discount on issue of bonds
$ 8,424.10
Bonds payable
$ 230,000.00
(To record issue of bonds at discount)