Question

On January 1, Year 1, Residence Company issued bonds with a $50,000 face value. The bonds were issued at 96 offering a 4% discount. They had a 20 year term, a stated rate of interest of 7%, and an effective rate of interest of 7.389%. Assuming Residence uses the effective interest rate method, the carrying value of the bond liability on January 1, Year 1 is (round any necessary computations to the nearest whole dollar)

Answer 1

REsidence Company

The Carrying value of the bond liability on January 1, Year 1 is:

= $50,000

Step-by-step explanation:

a) Data and Calculations:

Face value of bonds issued on January 1, Year 1 = $50,000

Bond's price on January 1, Year 1 = $48,000 ($50,000 * 0.96)

Discount on bonds = $2,000 ($50,000 * 4%)

Maturity period of bonds = 20 years

Stated or coupon interest rate = 7%

Effective interest rate = 7.389%

Carrying value of the bond liability on January 1, Year 1 is $50,000

Journal Entries on January 1, Year 1:

Debit Cash $48,000

Debit Bond's Discount $2,000

Credit Bond Payable $50,000

To record the issuance of bonds at 96.