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On January 1, 2020, Exsel Corporation issued 5-year bonds with a face value of $4,000,000 and received a cash inflow of $3,835,992
On January 1, 2020, Exsel Corporation issued 5-year bonds with a face value of $4,000,000 and received a cash inflow of $3,835,992. The bonds' stated interest rate is 6%, with interest payable annually on December 31. On the issue date, the market rate of interest for similar risk investments was 7%. Exsel's journal entry on January 1, 2020 to record the bond issue will include a: Credit to Discount on Bonds Payable of $164,008 Debit to Discount on Bonds Payable of $164,008 Debit to Premium on Bonds Payable of $164,008 Credit to Premium on Bonds Payable of $164,008
How much "Interest Expense" will Exsel show on its 2021 Income Statement? $104,973 $268,519 $270,516 $240,000
Expert Solution
Answer
1) Option B
Discount on bonds
= Fair Value - Issue Price
= 4000000 - 3835992
= $ 164008
| Date | Accounts Name | Debit | Credit |
| january 1st | Cash | 3835992 | |
| Discount on bonds | 164008 | ||
| Bonds Payable | 4000000 | ||
| ( to record the issue of bonds payable at discount ) |
2) Option C
interest Expense
= Carrying value * Market rate * ( 6/12 )
| Effective interest rate method | ||||
| Date | Interest on bonds (coupon rate) (4000000*6%*)) | interest expense (market rate) (7% * D) | increase in Carrying Value | Carrying Value |
| A | B | C (B-A ) | D | |
| Credit (Cash paid ) | Debit (interest expense) | Credit (Discount on bonds) | ||
| 01/01/20 | 3835992 | |||
| 31/12/20 | 240000.00 | 268519 | 28519 | 3864511 |
| 31/12/21 | 240000.00 | 270516 | 30516 | 3895027 |
interest Expense in 2021
= $ 270516
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