On January 1 of this year, Clearwater Corporation sold bonds with a face value of $766,000 and a coupon rate of 7 percent. The bonds mature in 10 years and pay interest annually every December 31.

On January 1 of this year, Clearwater Corporation sold bonds with a face value of $766,000 and a coupon rate of 7 percent.  The bonds mature in 10 years and pay interest annually every December 31. Clearwater uses the straight-line amortization method and also uses a discount account. Assume an annual market rate of interest of 8 percent. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Round your final answer to whole dollars.)

Required:

1. Prepare the journal entry to record the issuance of the bonds.

 

2. Prepare the journal entry to record the interest payment on December 31 of this year.

 

3. How will the bonds be reported on  Clearwater's December 31 Balance Sheet?

 

Here

Explanation:

1.

Present value:

$766,000 × 0.46319	=		354,804
$53,620* × 6.71008	=		359,794
Issue price	=	$	714,598**

Computations:

*Interest: $766,000 × .07 = $53,620

**Using Excel or a financial calculator results in a present value of $714,601 (rounded).

2.

Discount on bonds payable = ($51,402 / 10) = $5,140

3.

This is the book value of the bond payable. It is computed in one of two ways: (1) By subtracting the unamortized discount ($51,402 − $5,140) from the face value of the bonds ($766,000), or (2) by adding the amount of the discount amortized on December 31 ($5,140) to the book value of the bond at the beginning of the period ($714,598).