I. Bond discount (25 points) A company issued 10-year bonds with a par value of
ID: 2613321 • Letter: I
Question
I.Bond discount (25 points)
A company issued 10-year bonds with a par value of $20,000,000 and an 8% annual face on January 2, 2015. The issue price of the bond issue was $19,866,397 which reflected an 8.1% effective interest rate.
REQUIRED:
Determine the effect on the accounting equation upon recording the issuance of the bonds.
Determine the effect on the accounting equation upon recording the recognition of interest expense at December 31, 2015. Any premium or discount should be amortized using the effective interest rate method.
Determine the effect on the accounting equation upon recording the interest paid to the bondholders on January 2, 2016.
Determine the effect on the accounting equation upon recognizing the interest expense at December 31, 2016. Any premium or discount should be amortized using the effective interest rate method.
a.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
–
Expenses
=
Net
Income
b.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
–
Expenses
=
Net
Income
c.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
–
Expenses
=
Net
Income
d.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
–
Expenses
=
Net
Income
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
–
Expenses
=
Net
Income
Explanation / Answer
Bond Discount Amortization table
Date
Interets Payment
Interest Expense
Amortization of discount
Balance in Discount
Book value
20000000*8%
Previous Book value *8.1%
Cash (Assets )
Expense (Equity )
Discount on Bonds Payable (Assets)
A
B
C=B-A
D
20000000-D
Jan 2. 2015
133603
$ 19,866,397
Dec. 31, 2015
$ 1,600,000
$ 1,609,178
$ 9,178
$ 124,425
$ 19,875,575
Dec. 31, 2016
$ 1,600,000
$ 1,609,922
$ 9,922
$ 114,503
$ 19,885,497
a.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’ Equity
Revenues
–
Expenses
=
Net Income
$ 19,866,397
(Cash Received)
$ 133,603
(Discount on bonds Payable)
$ 20,000,000
=
$ 20,000,000
+
$ -
(Bonds Payable )
b.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’ Equity
Revenues
–
Expenses
=
Net Income
$ 18,266,397
(Cash Balance = 19866397-1600000)
$ 124,425
(Discount on bonds Payable)
$ 18,390,822
=
$ 20,000,000
+
$ (1,609,178)
$ -
-
$ 1,609,178
=
$ (1,609,178)
(Bonds Payable )
(Interest Expense)
Bond Discount Amortization table
Date
Interets Payment
Interest Expense
Amortization of discount
Balance in Discount
Book value
20000000*8%
Previous Book value *8.1%
Cash (Assets )
Expense (Equity )
Discount on Bonds Payable (Assets)
A
B
C=B-A
D
20000000-D
Jan 2. 2015
133603
$ 19,866,397
Dec. 31, 2015
$ 1,600,000
$ 1,609,178
$ 9,178
$ 124,425
$ 19,875,575
Dec. 31, 2016
$ 1,600,000
$ 1,609,922
$ 9,922
$ 114,503
$ 19,885,497
a.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’ Equity
Revenues
–
Expenses
=
Net Income
$ 19,866,397
(Cash Received)
$ 133,603
(Discount on bonds Payable)
$ 20,000,000
=
$ 20,000,000
+
$ -
(Bonds Payable )
b.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’ Equity
Revenues
–
Expenses
=
Net Income
$ 18,266,397
(Cash Balance = 19866397-1600000)
$ 124,425
(Discount on bonds Payable)
$ 18,390,822
=
$ 20,000,000
+
$ (1,609,178)
$ -
-
$ 1,609,178
=
$ (1,609,178)
(Bonds Payable )
(Interest Expense)