Question

On December 31, 2020, Lipton, Inc. sold $3,000,000 (face value) of bonds. The bonds are dated December 31, 2020, pay interest annually on December 31, and will mature on December 31, 2020 The following schedule was prepared by the accountant for 2020 Annual Interest Period Interest to Interest be paid Expense Amortization Unamortized Amount $75,000 51.750 Bond Carrying Value $2,925,000 2,948,250 1 $240,000 $263,250 $23,250 On the basis of the above information, answer the following questions What is the stated interest rate for this bond issue? Stated interest rate SHOW LIST OF ACCOUNTS What is the market interest rate for this bond issun? Market interest rate 5 What is the market interest rate for this bond issue? Market interest rate % SHOW LIST OF ACCOUNTS What was the selling price of the bonds as a percentage of the face value? (Round answer to 1 decimal place, e.g. 52.7.) Selling price SHOW LIST OF ACCOUNTS tudy Prepare the journal entry to record the sale of the bond issue on December 31, 2020. (Credit account titles are autofnatically indented wh manually.) Debit Date Account Titles and Explanation Dec 31, 2020 Credit SHOW LIST OF ACCOUNTS Prepare the journal entry to record the payment of interest and amortization of discount on December 31, 2021. (Credit account titles an entered. Do not indent manually.) Account Titles and Explanation Debit Dec 31, 2021 Date Credit ly SHOW LIST OF ACCOUNTS

Answer 1

Lipton, Inc.

1. Stated interest = Annual interest/Face value of bonds * 100

= $240,000/$3,000,000 * 100

= 8%

2. The market interest rate for this bond issue = Interest Expense/Price of issued bonds * 100

= $263,250/$2,925,000 * 100

= 9%

3. The selling price of the bonds as a percentage of the face value

= $2,925,000/$3,000,000 * 100

= 97,5%

4. Journal Entries:

Date Account Titles and Explanation Debit Credit

Dec 31, 2020 Cash $2,925,000

Bonds Discounts 75,000

Bonds Payable $3,000,000

To record the issuance of the bonds at a discount.

5. Journal Entries:

Date Account Titles and Explanation Debit Credit

Dec 31, 2021 Interest Expense $263,250

Amortization of bond discounts $23,250

Cash $240,000

To record the payment of interest and amortization of discount.

Step-by-step explanation:

a) Data and Calculations:

December 31, 2020

Face value of issued bonds = $3,000,000

Interest payment = December 31 annually

Unamortized Amount = $75,000

Price of issued bonds = $2,925,000 ($3,000,000 - $75,000)

Discount on bonds = $75,000 ($3,000,000 - $2,925,000)

Schedule:

2020 Annual Interest Interest Expense Amortization Bond Carrying Value

$2,925,000

1 $240,000 $263,250 $23,250 2,948,250

1. Stated interest = Annual interest/Face value of bonds * 100

= $240,000/$3,000,000 * 100

= 8%

2. The market interest rate for this bond issue = Interest Expense/Price of issued bonds * 100

= $263,250/$2,925,000 * 100

= 9%

3. The selling price of the bonds as a percentage of the face value

= $2,925,000/$3,000,000 * 100

= 97,5%

Analysis:

December 31, 2020:

Cash $2,925,000 Bonds Discounts $75,000 Bonds Payable $3,000,000

December 31, 2021:

Interest Expense $263,250 Amortization of bond discounts $23,250 Cash $240,000