Exercise 10-12A Identifying bond premiums and discounts

Accounting for Long-Term Debt

Exercise 10-12A Identifying bond premiums and discounts

Required

In each of the following situations, state whether the bonds will sell at a premium or discount:

a. Valley issued $300,000 of bonds with a stated interest rate of 7 percent. At the time of issue, the market rate of interest for similar investments was 6 percent.
b. Spring issued $220,000 of bonds with a stated interest rate of 5 percent. At the time of issue, the market rate of interest for similar investments was 6 percent.
c. River Inc. issued $150,000 of callable bonds with a stated interest rate of 5 percent. The bonds were callable at 102. At the date of issue, the market rate of interest was 6 percent for similar investments.

Exercise 10-13A Determining the amount of bond premiums and discounts

Required

For each of the following situations, calculate the amount of bond discount or premium, if any:

a. Gray Co. issued $80,000 of 6 percent bonds at 101¼.
b. Bush, Inc. issued $200,000 of 10-year, 6 percent bonds at 97½.
c. Oak, Inc. issued $100,000 of 20-year, 6 percent bonds at 103.
d. Willow Co. issued $180,000 of 15-year, 7 percent bonds at 99.

Exercise 10-14A Straight-line amortization of a bond discount

Diaz Company issued bonds with a $180,000 face value on January 1, Year 1. The bonds had a 7 percent stated rate of interest and a five-year term. Interest is paid in cash annually, beginning December 31, Year 1. The bonds were issued at 98. The straight-line method is used for amortization.

Required

a. Use a financial statements model like the one shown next to demonstrate how (1) the January 1, Year 1, bond issue and (2) the December 31, Year 1, recognition of interest expense, including the amortization of the discount and the cash payment, affect the company’s financial statements. Use + for increase, − for decrease, and NA for not affected.
b. Determine the carrying value (face value less discount or plus premium) of the bond liability as of December 31, Year 1.
c. Determine the amount of interest expense reported on the Year 1 income statement.
d. Determine the carrying value (face value less discount or plus premium) of the bond liability as of December 31, Year 2.
e. Determine the amount of interest expense reported on the Year 2 income statement.