Present Value of $1 PV of Annuity of $1 Amortization of Discount Stacy Company i
ID: 2399107 • Letter: P
Question
Present Value of $1 PV of Annuity of $1
Amortization of Discount
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 on this date is 12%, and Stacy Company receives proceeds of $9,279 on the bond issuance.
Required:
Refer to the tables above for present value factors.
1. Prepare a five-year table to amortize the discount using the effective interest method.
Note: Round the 12/31/18 interest expense and discount amortized up to the nearest dollar. For all other computations, follow normal rounding to the nearest dollar. Enter all amounts as positive numbers.
2. What is the total interest expense over the life of the bonds? cash interest payment? discount amortization?
3. Identify and analyze the effect of the payment of interest and the amortization of discount on December 31, 2019 (the third year).
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. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item.
Determine the balance sheet presentation of the bonds for December 31, 2019.
Stacy Company Discount Amortization Effective Interest Method of Amortization Date Cash Interest 10% Interest Expense 12% Discount Amortized Carrying Value 1/01/17 $ 12/31/17 $ $ $ 12/31/18 12/31/19 12/31/20 12/31/21 Totals $ $ $Explanation / Answer
Answers
Stacy Company
Discount Amortisation
Effective Interest Method of Amortization
Date
Cash Interest 10%
Interest Expense 12%
Discount Amortized
Carrying Value
[A = 10,000 x 10%]
[B = Last 'D' x 12%]
[C = B - A]
[D = D + C]
01-01-2017
$ 9,279
12/31/17
$ 1,000
$ 1,113
$ 113
$ 9,392
12/31/18
$ 1,000
$ 1,127
$ 127
$ 9,520
12/31/19
$ 1,000
$ 1,142
$ 142
$ 9,662
12/31/20
$ 1,000
$ 1,159
$ 159
$ 9,821
12/31/21
$ 1,000
$ 1,179
$ 179
$ 10,000
Totals
$ 5,000
$ 5,721
$ 721
Requirement 2
Interest Expense
$ 5,721
Cash Interest Payment
$ 5,000
Discounts amortisaztion
$ 721
Activity
Financing [Outflow $5,000]
Accounts
Interest Expense $1142 Increase, Discounts on Bonds Payable $142 Decrease, Cash $1,000 Decrease
Statements
Interest Expense = Income Statement affected; Discount 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 $9,279
=
Discount on Bonds Payable $(721)
+
Bonds Payable $ 10,000
Stacy Company
Balance Sheet (Partial)
December 31, 2019
Liabilities:
Bonds Payable
$ 10,000.00
Discounts on Bonds Payable
$ (338.00)
Total
$ 9,662.00
Stacy Company
Discount Amortisation
Effective Interest Method of Amortization
Date
Cash Interest 10%
Interest Expense 12%
Discount Amortized
Carrying Value
[A = 10,000 x 10%]
[B = Last 'D' x 12%]
[C = B - A]
[D = D + C]
01-01-2017
$ 9,279
12/31/17
$ 1,000
$ 1,113
$ 113
$ 9,392
12/31/18
$ 1,000
$ 1,127
$ 127
$ 9,520
12/31/19
$ 1,000
$ 1,142
$ 142
$ 9,662
12/31/20
$ 1,000
$ 1,159
$ 159
$ 9,821
12/31/21
$ 1,000
$ 1,179
$ 179
$ 10,000
Totals
$ 5,000
$ 5,721
$ 721