Need help please with a balance sheet?

Question

berol corporatin sold 20-year bonds on january 1, 2007. the face value of the bonds was 100,000 abd the carry a 9% stated rate of inerest, which is paid on december 31 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 amoritized using the effective interest method.

prepare the journal entry to record the sale of the bonds on january 1, 2007, and the proper balance sheet presentation date.

prepare the journal entry to record interst expense on december 31, 2007 and the proper balance sheet presentation on this date.

explain why it was necessary for berol to issue the bonds for only 91,526 rather than 100,000.

Answer 1

The market rate on these bonds is 10%, but the company is only paying interest of 9%.  To account for the extra 1%, the bonds will have to trade at a discount, hence they are at 91.526 rather than 100.  

Sale of bond:

CR Long Term Debt 100

DR Cash 91.526

DR Bond Discount 8.47 (a contra liability)

The interest expense entry is a little trickier

I think you have to use what is called the effective interest method but I forgot exactly how

CR Cash

DR Interest Expense

DR Discount Amortization

CR Bond Discount

The cash will definitely be 9% x 100,000 but not exactly sure about the rest.  You might just amortize the discount on a straight line basis.