Activation Exercise 14-2: Straight Line Bond Discount Amortization Terms and Def
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Question
Activation Exercise 14-2: Straight Line Bond Discount Amortization
Terms and Definitions
When a bond sells for less than its face amount, the difference between the selling price and the face amount is called a - Select your answer -discountpremiumCorrect 1 of Item 1. A bond discount or premium must be amortized to interest expense - Select your answer -on the date the bond is issuedover one yearover the life of the bondCorrect 2 of Item 1. The straight line method amortizes equal amounts of bond discount or premium to interest expense each period. Amortization of a bond discount - Select your answer -decreasesincreasesCorrect 3 of Item 1 the contract rate of interest to a rate of interest that approximates the market rate of interest.
Understanding the Business Transaction
Bonds sell at a discount when the market rate of interest is - Select your answer -equal toless thangreater thanCorrect 1 of Item 2 the contract rate of interest. Discount amortization is - Select your answer -added tosubtracted fromCorrect 2 of Item 2 the amount of cash interest paid, causing the amount of interest expense reported on the income statement to be - Select your answer -equal toless thangreater thanCorrect 3 of Item 2 the amount of semi-annual cash interest paid on a bond.
On January 1, 2014, Jack Company issues $3,583,000, 8%, 10-year bonds for cash of $3,136,481 when the market rate of interest is 10%. The bonds pay interest semi-annually on June 30 and December 31. Determine (1) the discount on bonds payable at the date of issuance, (2) the semi-annual cash interest payment, (3) the semi-annual discount amortization using the straight line method, and (4) the semi-annual interest expense.
Round your answers to the nearest whole dollar amount.
Recording in the Accounting System
Journalize the first interest payment and the amortization of the bond discount on June 30, 2014.
Round your answers to the nearest whole dollar amount. If an amount box does not require an entry, leave it blank.
When bonds sell at a discount, the semi-annual interest expense reported in the income statement will be - Select your answer -equal toless thangreater thanCorrect 1 of Item 4 the semi-annual cash interest paid to bondholders.
Financial Statement Impact
On July 1, 2014 Botwin Company issues $1,000,000, 10%, bonds payable. Use the sliders provided below for the market rate of interest and the number of semi-annual periods to answer the following questions.
Selling Price of Bonds $ Face Value of Bonds Discount on Bonds Payable $ Cash interest payment $ Discount amortization Interest expense $Explanation / Answer
Selling Price of Bonds=3,136,481
Face Value of Bonds= 3,583,000
Discount on bonds payable=$3,583,000-$3,136,481=$446,519
Semiannual cash interest payment=$3583000*(8%*1/2) =$143,320
Discount amortization=446519/10*1/2=22325.95
Interest expense$=$143,320+22325.95=$165,646
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