4. On January 1, 2017 Alliance Corporation issued five-year SI,000,000, 0% hnd a

Question

4. On January 1, 2017 Alliance Corporation issued five-year SI,000,000, 0% hnd at 95 ($950,000) representing a discount at time of sale of $50,000 Interest is paid annually o December 31. The market rate of interest is 8% (8 marks) Required a) Prepare the journal entry to record the issuance of the bond at January 1, 2017 b) Using the effective interest rate method, prepare the expense at December 31, 2017 journal entry to recognize the interest c) What is the carrying value of the bond at December 31,2017 and January 1,2022 (the maturity date)?

Explanation / Answer

a) Journal Entry for bond issuance Date Account titles & Explanations Debit Credit 1/1/2017 Cash 950,000 discount on bonds payable 50,000 Bonds payable 1,000,000 b) Journal Entry for interest expense Date Account titles & Explanations Debit Credit 12/31/2017 Interest expense (950,000*8%) 76000 discount on bonds payable 16,000 cash (1,000,000*6%) 60000 c) Carrying value of bond at December 31,2017 bonds payable 1,000,000 less discount on bonds (50,000-16000) 34000 Carrying value of bond at December 31,2017 966,000 Carrying value at maturity will be 1,000,000

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