Brock Company issued $86,000 face value of bonds on January 1, 2014. The bonds h
ID: 2448755 • Letter: B
Question
Brock Company issued $86,000 face value of bonds on January 1, 2014. The bonds had a 8 percent stated rate of interest and a 10-year term. Interest is paid in cash annually, beginning December 31, 2014. The bonds were issued at 98.
Use a financial statements model like the one shown below to demonstrate how (1) the January 1, 2014, bond issue and (2) the December 31, 2014, recognition of interest expense, including the amortization of the discount and the cash payment, affects the company’s financial statements. Use + for increase, for decrease, and NA for not affected. In the Cash Flow column, indicate whether the item is an operating activity (OA), an investing activity (IA), or a financing activity (FA) and NA for not affected.
Determine the carrying value (face value less discount or plus premium) of the bond liability as of December 31, 2014.
Determine the carrying value (face value less discount or plus premium) of the bond liability as of December 31, 2015.
Brock Company issued $86,000 face value of bonds on January 1, 2014. The bonds had a 8 percent stated rate of interest and a 10-year term. Interest is paid in cash annually, beginning December 31, 2014. The bonds were issued at 98.
Explanation / Answer
Answer:-
a.Use a financial statements model like the one shown below to demonstrate how (1) the January 1, 2014, bond issue:-
Answer:- Issuance of bond will affect the Balance Sheet and Cash Flow Statement not the income statement.
(2) the December 31, 2014, recognition of interest expense, including the amortization of the discount and the cash payment, affects the company’s financial statements.
Entry goes as below
Dr Cash 84,280
Dr Discount on issue of bonds 1,720
Cr Bonds Payable 86,000(86000/100= 860 bond @ 100 face value)
Amortization will be on the discount value =$1,720/10= $172
Interest Expense= $86,000*0.08 = $6,880
Dec 31,2014
Dr Interest Expense 6,880
Cr Cash 6,708
Cr Discount on Bonds 172
Now, lets analyse the impact of these transactions on Financial statements
(1) Issuance of bonds at discount will imapct
Balance sheet - Will be shown under Liabilitis side
Cash Flow statement - This will impact financing activities.
(2) recognition of interest expense, including the amortization of the discount and the cash payment,
Interest Expense- Will impact both income statement(shwon on Debit side) and Cash flow statement( sown under financing activity)
Amortization of the discount payment- Will be shown under balance sheet and CAsh flow statement -Operating activitiesCash payment- Will impact Balance sheet .
Determine the amount of interest expense reported on the 2014 income statement
As recognised in step 2:- Interest Expense= $86,000*0.08 = $6,880
Determine the carrying value (face value less discount or plus premium) of the bond liability as of December 31, 2014
Carrying Value = 86,000 -172 = $85,828
Determine the amount of interest expense reported on the 2015 income statement.
Interest expense = 86,000* .08= $6,880
Determine the carrying value (face value less discount or plus premium) of the bond liability as of December 31, 2015.
Carrying Value = $85,828 - 172 = $85,656
b.Determine the amount of interest expense reported on the 2014 income statement
As recognised in step 2:- Interest Expense= $86,000*0.08 = $6,880
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