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

Accounting for Long-Term Debt

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

Frey Company issued bonds of $300,000 face value on January 1, Year 1. The bonds had a 6 percent stated rate of interest and a 10-year term. Interest is paid in cash annually, beginning December 31, Year 1. The bonds were issued at 98. Frey uses the straight-line method of 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 amount of interest expense reported on the Year 1 income statement.
c. Determine the carrying value (face value less discount or plus premium) of the bond liability as of December 31, Year 1.
d. Determine the amount of interest expense reported on the Year 2 income statement.
e. Determine the carrying value (face value less discount or plus premium) of the bond liability as of December 31, Year 2.

Exercise 10-15B Straight-line amortization of a bond discount

Dixon Construction, Inc. issued $300,000 of 10-year, 6 percent bonds on July 1, Year 1, at 96. Interest is payable in cash semiannually on June 30 and December 31. Dixon uses the straight-line method of amortization.

Required
a. Prepare the journal entries to record issuing the bonds and any necessary journal entries for Year 1 and Year 2. Prepare any necessary closing entries for Year 1. Post the entries to T-accounts.
b. Prepare the liabilities section of the balance sheet at the end of Year 1 and Year 2.
c. What amount of interest expense will Dixon Construction report on the financial statements for Year 1 and Year 2?
d. What amount of cash will Dixon Construction pay for interest in Year 1 and Year 2?

Exercise 10-16B Straight-line amortization for bonds issued at a discount

On January 1, Year 1, Files Co. issued $400,000 of five-year, 6 percent bonds at 97. Interest is payable annually on December 31. The discount is amortized using the straight-line method.

Required
Prepare the journal entries to record the bond transactions for Year 1 and Year 2.

Exercise 10-17B Straight-line amortization of a bond premium

Ramsey Company issued bonds of $300,000 face value on January 1, Year 1. The bonds had a 6 percent stated rate of interest and a 10-year term. Interest is paid in cash annually, beginning December 31, Year 1. The bonds were issued at 101½. 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 premium 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 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 of the bond liability as of December 31, Year 2.
e. Determine the amount of interest expense reported on the Year 2 income statement.

Exercise 10-18B Straight-line amortization for bonds issued at a premium

On January 1, Year 1, Chen Company issued $300,000 of five-year, 6 percent bonds at 101. Interest is payable annually on December 31. The premium is amortized using the straight-line method.

Required
Prepare the journal entries to record the bond transactions for Year 1 and Year 2.