Amortization of Premium Stacy Company issued five-year, 10% bonds with a face va
ID: 2399666 • Letter: A
Question
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.
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2. What is the total interest expense over the life of the bonds? cash interest payment? premium amortization?
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3. Identify and analyze the effect of the payment of interest and the amortization of premium on December 31, 2019 (the third year)
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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.
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Determine the balance sheet presentation of the bonds on December 31, 2019.
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 $ $ $Explanation / Answer
Answer
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 = 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
Interest expense
$ 4,201
Cash interest payment
$ 5,000
Premium amortized
$ 799
Activity
Operating
Accounts
Cash Decrease by $1,000, Premium on Bonds Payable Decrease by $159, Interest Expense Increase by $841
Statement(s)
Balance Sheet and Income Statement
Balance Sheet
Income Statement
Stockholders'
Net
Assets
=
Liabilities
+
Equity
Revenues
–
Expenses
=
Income
Cash
$ (1,000.00)
Premium on Bonds Payable
$ (159.00)
$ (841.00)
No Entry
Interest Expense
$ 841.00
$ (841.00)
Stacy Company
Balance Sheet (Partial)
December 31, 2019
Bonds payable
$ 10,000
Premium on bonds payable
$ 357
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 = 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
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