1. Starlight Corporation issued a 8% $1,000,000 bond on January 1, 2014. The bond matures on January 1, 2019. Interest on the bond is payable semi-annually on July 1 and January 1 of each year. From the sale of the bond, the company received proceeds of $922,779. The required effective interest rate on the bond was 10%.

Instructions

(a) Calculate the discount on the bond. (6 marks)

(b) Prepare a bond amortization schedule for the 5 years. Be sure to clearly show the semiannual interest payments. (10 marks)

(c) Prepare the necessary journal entries to show:

i. The issuance of the bond on January 1, 2014 ACCT 2015 INTERMEDIATE FINANCIAL ACCOUNTING 11 Course Information. Academic Year 2017/2018, Semester 2 Page 24 of 41

ii. Interest payments on July 1, 2014

iii. Interest payments on December 31, 2014 (8 marks)

(d) Recently, the FASB and the IASB allowed companies the option of recognizing in their financial statements the fair values of their long-term debt. However, some users of the financial statements have become critical of the fair value option for financial liabilities. Describe the controversy of applying the fair value option to financial liabilities and discuss any implications it may have to the faithful representation of financial information. (6 marks)