8 On January 1 Year One Gulka Corporation offers to issue a

8. On January 1, Year One, Gulka Corporation offers to issue a $100,000 bond coming due in exactly ten years. This bond pays a stated cash interest rate of 6 percent per year on December 31. A buyer is found. After some negotiations, the parties agree on an effective annual yield rate of 7 percent. Consequently, the bond is issued for $92,974. The effective rate method is applied. a. What figures will be reported for this bond in Gulka’s Year One financial statements? b. What figures will be reported for this bond in Gulka’s Year Two financial statements

Solution

Bond Discount Amortization Schedule Year Interest Paid - $100,000 X 6% Interest Expense - Preceeding Bond Carrying Value X 7% Discount Amortization Unamortized Discount Bonds Carrying Amount A B C = B-A D = D - C E = $100,000 - D 0                                    -                                   -                                      -                          7,026                    92,974 1                             6,000                          6,508                                 508                        6,518                    93,482 2                             6,000                          6,544                                 544                        5,974                    94,026 Answer a & b. Year 1 Year 2 Income Statement Interest Expense                          6,508                             6,544 Balance Sheet Bonds Payable                     100,000                         100,000 Less: Discount on issue of Bonds                          6,518                             5,974 Bonds Payable (Net)                        93,482                           94,026