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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Brief Exercise 9- Bonds Issued at a Discount (Effective Interest)

Refer to the information for Crafty Corporation on the previous page.

Required:

Prepare the journal entries for December 31, 2021 and 2022.

Use the following information for Brief Exercises 9-55 and 9-56:

Crafty Corporation received 5472,088 of cash upon issuance of 500 $1,000 par value bonds. Each bond has a stated rate of 5% and will mature on December 31, 2026, 7 years after the issuance of the bonds, interest is paid annually on December 31. The market rate of interest is 6%.

To determine

Concept introduction:

Bonds:

Bonds are debt instruments issued by the borrower company to its lenders. Bonds are issued at a specified rate of interest and for a specified time period. The bondholders get a fixed rate of interest on the bonds and repayment of the bonds at the maturity date.

Amortization of Bonds premium or discount:

Bonds may be issued at a premium or discount. The premium or discount on issue of binds is amortized or the life of bonds using the straight line or effective rate methods.

To prepare:

The journal entries for Dec. 31, 2020 and 2021.

Explanation

The Amortization table for Bonds using the effective interest method is explained as follows:

Amortization Table
Using the effective interest rate method
Semiannual Interest Period-End Cash Interest Paid Bond Interest Expense Discount Amortized Unamortized Discount Carrying Value
A=300000*5%/2 B =Prior E *7%/2 C =B-A D =Prior D -C E = 300000-D
0 Jan. 1, 2020 $ - $ - $ 42,637 $ 257,363
1 Dec. 31, 2020 $ 7,500 $ 9,008 $ 1,508 $ 41,129 $ 258,871
2 Dec. 31, 2021 $ 7,500 $ 9,060 $ 1,560 $ 39,569 $ 260,431

The journal entries for Dec...

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