Exercise 10-21A Effective Interest Amortization of a Bond Premium
On January 1, Year 1, Young Company issued bonds with a face value of $300,000, a stated rate of interest of 7 percent, and a 10-year term to maturity. Interest is payable in cash on December 31 of each year. The effective rate of interest was 6 percent at the time the bonds were issued. The bonds sold for $323,165. Young used the effective interest rate method to amortize the bond premium.
Required
a. Determine the amount of the premium on the day of issue.
b. Determine the amount of interest expense recognized on December 31, Year 1.
c. Determine the carrying value of the bond liability on December 31, Year 1.
d. Provide the general journal entry necessary to record the December 31, Year 1, interest expense.
Exercise 10-22A Effective Interest Amortization for a Bond Premium
On January 1, Year 1, Hart Company issued bonds with a face value of $150,000, a stated rate of interest of 8 percent, and a five-year term to maturity. Interest is payable in cash on December 31 of each year. The effective rate of interest was 7 percent at the time the bonds were issued. The bonds sold for $156,150. Hart used the effective interest rate method to amortize the bond premium.
Required
a. Prepare an amortization table as shown next:
| Cash Payment | Interest Expense | Premium Amortization | Carrying Value | |
|---|---|---|---|---|
| January 1, Year 1 | 156,150 | |||
| December 31, Year 1 | 12,000 | 10,931 | 1,069 | 155,081 |
| December 31, Year 2 | ? | ? | ? | ? |
| December 31, Year 3 | ? | ? | ? | ? |
| December 31, Year 4 | ? | ? | ? | ? |
| December 31, Year 5 | ? | ? | ? | ? |
| Totals | 60,000 | 53,850 | 6,150 |
b. What item(s) in the table would appear on the Year 4 balance sheet?
c. What item(s) in the table would appear on the Year 4 income statement?
d. What item(s) in the table would appear on the Year 4 statement of cash flows?
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