The following information applies to the questions displayed below.) Claire Corp

Question

The following information applies to the questions displayed below.) Claire Corporation is planning to issue bonds with a face value of $280,000 and a coupon rate of 8 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 12 percent. (FV of $1 PV of $1, FVA of $1, and PVA of S1 (Use the appropriate factorfs) from the tables provided.)

Explanation / Answer

1. Coupon interest rate per quarter = 8%/4 = 2%

Market interest rate per quarter = 12%/4 = 3%

No. of quarters until maturity = 2 x 4 = 8

Issue price of bonds = (Quarter interest payments x PVIFA3%,8) + (Face value x PVIF3%,8)

= ($280000 x 2% x 7.01969) + ($280000 x 0.78941)

= $260345

Journal

2.

Journal

3. Bonds payable = $272945 + $2588 = $275533

Date Account Name Debit Credit Jan 1 Cash $260345 Discount on bonds payable 19655 Bonds payable $280000 (To record issue of bonds at discount)

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