Question

On January 1, 2018, Hart Company issued bonds with a face value of $60,000, a stated rate of interest of 8 percent, and a five-year term to maturity. Interest is payable in cash on December 31 of each year. The effective rate of interest was 9 percent at the time the bonds were issued. The bonds sold for $57,666. Hart used the effective interest method to amortize the bond. (Round your answers to the nearest whole dollar amount.) Required: Determine the amount of the discount on the day of issue. Determine the amount of interest expense recognized on December 31, 2018. Determine the carrying value of the bond liability on December 31, 2018.

Answer 1

Answer:

a) discount on bonds payable 2,334

b) interest expense 5,189.94

c) carrying value 58,055.94

Explanation:

The difference between the amount at which the bonds were issued and the face value is the discount:

proceeds 57,666 (carrying value at year 0)

face value 60,000

discount on bonds payable 2,334

Interest expense will be the carrying value times market rate

interest expense 57,666 x 0.09 = 5189.94

cash proceeds are always the same: face value x bonds rate

cash proceeds 60,000 x 0.08 = 4,800

the difference isthe amortization on the discount:

amortization                                  389.94

carrying value: 57,666 + 389.94 = 58,055.94‬