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 $95,650 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.

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, 2017Liabilities $fill in the blank 90b3f4ffaff704b_2 fill in the blank 90b3f4ffaff704b_4$fill in the blank 90b3f4ffaff704b_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.

Stockholders'

Net

Assets

=

Liabilities

+

Equity

Revenues

Expenses

=

Income

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

Vasily Inc.Balance Sheet (Partial)December 31, 2017Liabilities $fill in the blank 8b158a08f071fae_2 fill in the blank 8b158a08f071fae_4$fill in the blank 8b158a08f071fae_5

3. Why it was _______ necessary for Vasily to issue the bonds for only $95,650 rather than $100,000?

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