Southwest Corporation issued bonds with the following details:
Face value: $700,000 |
Interest: 10 percent per year payable each December 31 |
Terms: Bonds dated January 1, 2018, due five years from that date |
The annual accounting period ends December 31. The bonds were issued at 103 on January 1, 2018, when the market interest rate was 9 percent. Assume the company uses straight-line amortization and adjusts for any rounding errors when recording interest expense in the final year.
Required:
1. Compute the cash received from the bond issuance in dollars. TIP: The issue price typically is quoted at a percentage of face value.
2. & 3. Prepare the journal entry to record the issuance of the bonds and the payment of interest on December 31, 2018 and 2019.
4-a. How much interest expense would be reported on the income statements for 2018 and 2019?
4-b. Compute the bond value which should be reported on the balance sheets at December 31, 2018 and 2019.
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