Impact of a Discount

Vasily Inc. sold 20-year bonds on January 1, 2017. 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. Vasily received $92,340 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. Identify and analyze the effect of the sale of the bonds on January 1, 2017.

Activity
Accounts
Statement(s)

How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item.

Balance Sheet

Income Statement

Stockholders'

Net

Assets

=

Liabilities

+

Equity

Revenues

Expenses

=

Income

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Prepare a proper balance sheet presentation for January 1, 2017.

Vasily Inc.
Balance Sheet (Partial)
January 1, 2017
Liabilities
	$fill in the blank 54a355082047fe7_2
	fill in the blank 54a355082047fe7_4
	$fill in the blank 54a355082047fe7_5

2. Identify and analyze the effect of the payment of interest on December 31, 2017.

Activity
Accounts
Statement(s)

How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item. Round the amounts to the nearest whole dollar.

Balance Sheet

Income Statement

Stockholders'

Net

Assets

=

Liabilities

+

Equity

Revenues

Expenses

=

Income

fill in the blank

fill in the blank

fill in the blank

fill in the blank

fill in the blank

fill in the blank

Prepare a proper balance sheet presentation for December 31, 2017.

Vasily Inc.
Balance Sheet (Partial)
December 31, 2017
Liabilities
	$fill in the blank
	fill in the blank
	$fill in the blank

3. Why it was necessary for Vasily to issue the bonds for only $92,340 rather than $100,000?

Because the of interest was greater than the the issuance price will have to be lower than the face value.