Question

Bonds Issued at a Discount (Effective Interest) Crafty Corporation received $472,088 of cash upon issuance of 500, $100 par value bonds. Each bond has a stated rate of 5% and will mature on December 31, 2030, 7 years after the issuance of the bonds. Interest is paid annually on December 31. The market rate of interest is 6%. Required: Prepare the journal entry for December 31, 2026. If an amount box does not require an entry, leave it blank. When required, round amounts to the nearest whole dollar. 2026 Dec. 31 Interest Expense Interest Expense Interest Expense Discount on Bonds Payable Discount on Bonds Payable Discount on Bonds Payable Cash Cash Cash Prepare the journal entry for December 31, 2027. If an amount box does not require an entry, leave it blank. When required, round amounts to the nearest whole dollar. 2027 Dec. 31 Interest Expense Interest Expense Interest Expense Discount on Bonds Payable Discount on Bonds Payable Discount on Bonds Payable Cash Cash Cash

Answer 1

The Crafty Corporation will record the following Journal Entries:

1. Dec. 31, 2026:

Debit Interest Expense $28,325

Credit Discount amortization $3,325

Credit Cash $25,000

To record the first interest payment and amortization of discount.

2. Dec. 31, 2027:

Debit Interest Expense $28,525

Credit Discount amortization $3,525

Credit Cash $25,000

To record the second interest payment and amortization of discount.

Data and Calculations:

Cash proceeds from bonds issuance = $472,088

Face value of bonds = $500,000

Discounts on bonds = $27,912 ($500,000 - $472,088)

Coupon interest rate = 5%

Market interest rate = 6%

Maturity period = 7 years

December 31, 2026:

Interest expense = $28,325 ($472,088 x 6%)

Cash paid = $25,000

Discount amortization = $3,325 ($28,325 - $25,000)

Bond's value = $475,413 ($472,088 + $3,325)

December 31, 2027:

Interest expense = $28,525 ($475,413 x 6%)

Cash paid = $25,000

Discount amortization = $3,525 ($28,525 - $25,000)

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