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    Impact of Discount and Premium

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    Impact of a Discount

    Berol Corporation sold 20-year bonds on January 1, 2008. The face value of the bonds was $100,000; and they carry a 9% stated rate of interest, which is paid on December 31 of every year. Berol received $91,526 in return for the issuance of the bonds when the market rate was 10%. Any premium or discount is amortized using the effective interest method.

    Required:

    1. Prepare the journal entry to record the sale of the bonds on January 1, 2008, and the proper balance sheet presentation on this date.

    2. Prepare the journal entry to record interest expense on December 31, 2008, and the proper balance sheet presentation on this date.

    3. Explain why it was necessary for Berol to issue the bonds for only $91,526 rather thn $100,000.

    Impact of a Premium

    Assume the same set of facts for Berol Corporation as listed above except that it received $109,862 in return for the issuance of the bonds when the market rate was 8%.

    Required:

    1. Prepare the journal entry to record the sale of the bonds on January 1, 2008, and the proper balance sheet presentation on this date.

    2. Prepare the journal entry to record interest expense on December 31, 2008, and the proper balance sheet presentation on this date.

    3. Explain why the company was able to issue the bonds for $109,862 rather than for the face amount.

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    https://brainmass.com/business/bond-valuation/berol-corporation-impact-of-a-discount-and-impact-of-a-premium-on-sale-of-bonds-221341

    Solution Preview

    Part 1: Impact of a discount

    1. Journal Entry
    Jan. 1, 2008 Cash 91,526
    Discount on Bonds Payable 8,474
    Bonds Payable 100,000

    Balance Sheet Entry
    Assets = Liabilities + Owners' Equity

    +91,526 = -8,474 + 0
    +100,000

    2. Journal Entry
    Dec 31, 2008 Interest Expense 9,153 ...

    Solution Summary

    Journal entries for sale of bonds records and interest expenses are given along with explanations of why Berol issued bonds at a value different to the face amount.

    $2.19

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