Red Inc. issued 100 15-year bonds each with a face value of $1,000 on January 1, 20X1. The bonds have a coupon rate of 4% and coupons are paid on June 30^th and December 31^st. When the bonds are issued, the market rate is 5%. Use this information to answer questions (a), (b), and (c).

b. Provide the journal entry (accounts and amounts) Red Inc. would record at the issuance of the bonds (2 points for J/E accounts and 4 points for correct amounts).

c. Provide the journal entry to account for interest expense that will be incurred from January 1, 20X1 to June 30, 20X1 (6 points, 3 points for J/E accounts, and 3 points for correct amounts).

d. Suppose that on July 1, 20X1, the market rate of interest decreased by 1%. Given this change in the market rate, would the interest expense incurred between July 1 and December 31 be higher, lower, or the same as the interest expense had the market rate remained the same?

e. Suppose Red Inc. is being sued by a group of customers. On December 31, 20X1 (the fiscal year-end), Red Inc. determines that it is reasonably possible that they will lose the lawsuit and have to pay an estimated sum of $2,500,000 to the customers. Provide the journal entry, if any, that Red Inc. will record on December 31, 20X1 to account for this contingency.

f. Based on the information in question (e) above, what is the effect of this contingency on the net income of Red Inc?

g. What, if any, should Red Inc. report in its footnote disclosure and why. ?

Answer rating: 100% (QA)

Answer REQUIREMENT A The Bond Payable is issued at a discount of 2131857 1 Journal entry to r... View the full answer