Exercise 10-15A Straight-line amortization of a bond premium

Accounting for Long-Term Debt

Exercise 10-15A Straight-line amortization of a bond premium

The Square Foot Grill, Inc. issued $200,000 of 10-year, 6 percent bonds on July 1, Year 1, at 102. Interest is payable in cash semiannually on June 30 and December 31. The straight-line method is used for amortization.

Required

a. Prepare the journal entries to record issuing the bonds and any necessary journal entries for Year 1 and Year 2. Post the journal entries to T-accounts. Prepare any necessary closing entries for Year 1.
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 Square Foot report on the financial statements for Year 1 and Year 2?
d. What amount of cash will Square Foot pay for interest in Year 1 and Year 2?

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

On January 1, Year 1, Price Co. issued $190,000 of five-year, 6 percent bonds at 96½. 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 10-17A Straight-line amortization of a bond premium

Stuart Company issued bonds with a $150,000 face value on January 1, Year 1. The bonds had a 6 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 103. 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 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 of the bond liability as of December 31, Year 2.
e. Determine the amount of interest expense reported on the Year 2 income statement.