Amortization of Premium Stacy Company issued fiveyear 10 bon

Amortization of Premium

Stacy Company issued five-year, 10% bonds with a face value of $10,000 on January 1, 2017. Interest is paid annually on December 31. The market rate of interest of January 1, 2017, is 8% and the proceeds from the bond issuance equal $10,799.

Required:

1. Prepare a five-year table to amortize the premium using the effective interest method. Enter all amounts as positive numbers. If required, round all calculations and final answers to the nearest dollar.

*Note: Due to rounding you will have to adjust the interest expense for 12/31/21 so the carrying value equals $10,000.

Feedback

Face rate of interest is the amount of interest that will be paid on the bonds as indicated in the bond contract. Determine the interest expense. Determine premium amortized. Deduct the amortized premium from carrying value for new carrying value.

2. What is the total interest expense over the life of the bonds? cash interest payment? premium amortization?

3. Identify and analyze the effect of the payment of interest and the amortization of premium on December 31, 2019 (the third year)

Feedback

Identify and analyze the transaction by using the following steps:
1. Determine activity – operating, investing or financing.
2. Determine accounts affected and the amount of increases/decreases.
3. Determine the financial statements affected – balance sheet, income statement.
The accounting equation must balance for each transaction.
Bonds are recorded on the balance sheet at an amount that takes into account the premium or discount associated with the bonds on the date they are issued. Bond premiums represent amounts paid in excess of par, and bond discounts represent amounts paid below par value.
A premium or discount represents the difference between the face value and the issuance price of the bond. A discount is a deduction to the bonds payable liability and thus is a contra-liability. A premium is an addition to the bonds payable liability on the balance sheet.

How does this entry affect the accounting equation?
If a financial statement item is not affected, select \"No Entry\" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.

Feedback

Incorrect

Determine the balance sheet presentation of the bonds on December 31, 2019.

Feedback

Stacy Company
Premium Amortization
Effective Interest Method of Amortization
Date	Cash Interest 10%	Interest Expense 8%	Premium Amortized	Carrying Value
1/01/17				$
12/31/17	$	$	$
12/31/18
12/31/19
12/31/20
12/31/21
Totals	$	$	$

Solution

Answers

Stacy Company

Premium Amortization

Effective Interest Method of Amortization

Date

Cash Interest 10%

Interest Expense 8%

Premium Amortized

Carrying Value

[A = 10,000 x 10%]

[B = Last \'D\' x 8%]

[C = A - B]

[D = D - C]

01-01-2017

$                       10,799

12/31/17

$                1,000

$                                        864

$                      136

$                       10,663

12/31/18

$                1,000

$                                         853

$                      147

$                       10,516

12/31/19

$                1,000

$                                         841

$                      159

$                       10,357

12/31/20

$                1,000

$                                         829

$                      171

$                       10,186

12/31/21

$                1,000

$                                         814

$                      186

$                       10,000

Totals

$                5,000

$                                     4,201

$                      799

Requirement 2

Interest Expense

$                4,201

Cash Interest Payment

$                5,000

Premium amortized

$                    799

Activity

Financing [Outflow of $1,000]

Accounts

Interest Expense $841 Increase, Premium on Bonds Payable $159 Decrease, Cash $1,000 Decrease

Statements

Interest Expense = Income Statement affected; Premium on Bonds Payable = Balance Sheet (Liabilities) affected, Cash = Balance Sheet (Assets) affected.

Balance Sheet

Income Statement

Stockholders\'

Net

Assets

=

Liabilities

+

Equity

Revenues

–

Expenses

=

Income

Cash $10,799

=

Premium on Bonds Payable $799

+

Bonds Payable $ 10,000

Stacy Company

Balance Sheet (Partial)

December 31, 2019

Liabilities:

Premium on Bonds Payable [799 - 442]

$              357.00

Bonds Payable

$        10,000.00

Total

$        10,357.00

Stacy Company
Premium Amortization
Effective Interest Method of Amortization
Date	Cash Interest 10%	Interest Expense 8%	Premium Amortized	Carrying Value
	[A = 10,000 x 10%]	[B = Last \'D\' x 8%]	[C = A - B]	[D = D - C]
01-01-2017				$                       10,799
12/31/17	$                1,000	$                                        864	$                      136	$                       10,663
12/31/18	$                1,000	$                                         853	$                      147	$                       10,516
12/31/19	$                1,000	$                                         841	$                      159	$                       10,357
12/31/20	$                1,000	$                                         829	$                      171	$                       10,186
12/31/21	$                1,000	$                                         814	$                      186	$                       10,000
Totals	$                5,000	$                                     4,201	$                      799