1. Starlight Corporation issued a 8% $1,000,000 bond on January 1, 2014. The bon
ID: 2550029 • Letter: 1
Question
1. Starlight Corporation issued a 8% $1,000,000 bond on January 1, 2014. The bond matures on January 1, 2019. Interest on the bond is payable semi-annually on July 1 and January 1 of each year. From the sale of the bond, the company received proceeds of $922,779. The required effective interest rate on the bond was 10%.
Instructions
(a) Calculate the discount on the bond. (6 marks)
(b) Prepare a bond amortization schedule for the 5 years. Be sure to clearly show the semiannual interest payments. (10 marks)
(c) Prepare the necessary journal entries to show:
i. The issuance of the bond on January 1, 2014 ACCT 2015 – INTERMEDIATE FINANCIAL ACCOUNTING 11– Course Information. Academic Year 2017/2018, Semester 2 Page 24 of 41
ii. Interest payments on July 1, 2014
iii. Interest payments on December 31, 2014 (8 marks)
(d) Recently, the FASB and the IASB allowed companies the option of recognizing in their financial statements the fair values of their long-term debt. However, some users of the financial statements have become critical of the fair value option for financial liabilities. Describe the controversy of applying the fair value option to financial liabilities and discuss any implications it may have to the ‘faithful representation’ of financial information. (6 marks)
Explanation / Answer
a.
Face Value of the bond = $1,000,000
Proceeds of the bond = $922,779
Discount on the bond = $ 77,221
b.
c.
Date Cash Interest Discount Balance of Book Value Face Value Payment Expense amortized discount 1/1/2014 77221 922779 1000000 7/1/2014 40000 46139 6139 71082 928918 1000000 12/31/2014 40000 46446 6446 64636 935364 1000000 7/1/2015 40000 46768 6768 57868 942132 1000000 12/31/2015 40000 47107 7107 50761 949239 1000000 7/1/2016 40000 47462 7462 43299 956701 1000000 12/31/2016 40000 47835 7835 35464 964536 1000000 7/1/2017 40000 48227 8227 27238 972762 1000000 12/31/2017 40000 48638 8638 18599 981401 1000000 7/1/2018 40000 49070 9070 9529 990471 1000000 12/31/2018 40000 49530 9530 0 1000000 1000000Related Questions
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