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3 years ago

The following appeared in the October 15, 2021, issue of the Financial Smarts Journal:

Business

1 answer:

larisa [96]3 years ago

3 0

Answer:

1. The market rate of interest is higher than 7.75% when the Craft Foods bonds were issued.

2. Debit Cash for $746,700,000; Dbit Discount on bond payable for $3,225,000; Debit Bond issue cost for $75,000; and Credit Bond payable for $750,000,000.

Explanation:

1. Based on the information provided in the announcement, indicate whether the market rate of interest is higher or lower than 7.75% when the Craft Foods bonds were issued.

From the information provided, it can be observed that the face value of this bond is 100% but it is issued at 99.57% price. Since the issue price of 99.57% is less than the face value, this implies that the bond is issued at a discount.

When a bond is issued at a discount, it indicates the stated interest rate is lower than the market interest rate.

Therefore, the market rate of interest is higher than 7.75% when the Craft Foods bonds were issued.

2. If debt issue costs were $75,000 and the bonds were issued on an interest payment date, what entry did Craft use to record the sale?

Before the journal entry is prepared, the following are first calculated:

Proceeds from bond issue = Bond price * Total face value = $750,000,000 * 99.57% = $746,775,000

Discount on bond = Total face value - Proceeds from bond issue = 750,000,000 - $746,775,000 = $3,225,000

Cash = Proceeds from bond issue - Debt issue costs = $746,775,000 - $75,000 = $746,700,000

The journal entry will now look as follows:

Description Debit ($) Credit ($)

Cash 746,700,000

Discount on bond payable 3,225,000

Bond issue cost 75,000

Bond payable 750,000,000

(To record bond issue at a discount.)

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