Issued Bonds at a Discount (Effective Interest) Crafty Corporation issued $475,000 of 5%, 7-year bonds on December 31, 2013, for $448,484. Interest is paid annually on December 31. The market rate of interest is 6%. Required: Hide Prepare the journal entry for December 31, 2014 and 2015. If an amount box does not require an entry, leave it blank. If required, round your answers to the nearest whole dollar. Journal Account and Explanation Debit Credit Dec. 31, 2014 Dec. 31, 2015

The journal entry for December 31, 2014, and December 31, 2015, involves recording the interest expense and interest payable related to the bonds issued at a discount by Crafty Corporation.

To start, let’s consider the bond issued on December 31, 2013. Crafty Corporation issued $475,000 of 5%, 7-year bonds for $448,484. This means that the bonds were issued at a discount. The discount is the difference between the face value of the bonds ($475,000) and the proceeds received ($448,484), which is $26,516 ($475,000 – $448,484).

Now, let’s calculate the interest expense and interest payable for each year based on the given information. The market rate of interest is 6%, which is higher than the stated rate of 5%. This implies that the bonds were issued at a discount because the market rate is higher than the stated rate.

For the first year, December 31, 2014:
Interest expense = Carrying value at the beginning of the year × market rate
Carrying value at the beginning of the year = Proceeds received – Discount
= $448,484 – $26,516
= $421,968
Interest expense = $421,968 × 6%
= $25,318.08

To record the interest expense, we debit Interest expense and credit Interest payable. The journal entry for December 31, 2014, would be:

Dr. Interest expense $25,318
Cr. Interest payable $25,318

For the second year, December 31, 2015:
The carrying value at the beginning of the year is the face value of the bond ($475,000) minus the discount ($26,516), which is $448,484.
Interest expense = Carrying value at the beginning of the year × market rate
Interest expense = $448,484 × 6%
= $26,909.04

Again, to record the interest expense, we debit Interest expense and credit Interest payable. The journal entry for December 31, 2015, would be:

Dr. Interest expense $26,909
Cr. Interest payable $26,909

It is worth noting that the interest paid annually on December 31 also needs to be recorded. However, this information is not provided in the question. Hence, the entry for the payment of interest is not included in this response.

In summary, the journal entry for December 31, 2014, is:

Dr. Interest expense $25,318
Cr. Interest payable $25,318

The journal entry for December 31, 2015, is:

Dr. Interest expense $26,909
Cr. Interest payable $26,909

These entries represent the recognition of interest expense and the corresponding liability of interest payable for the bonds issued at a discount by Crafty Corporation.