Akron Corporation, whose annual accounting period ends on December 31, issued th

Question

Akron Corporation, whose annual accounting period ends on December 31, issued the following bonds: Date of bonds: January 1, 2014 Maturity amount and date: $125,000 due in 10 years Interest: 10 percent per annum payable each June 30 and December 31 Date sold: January 1, 2014 Straight-line amortization is used. Provide the following amounts to be reported on the December 31, 2014, financial statements:: at par, at 98 and at 109 for the below: Interest expense Bonds payable Unamortized premium or discount Net liability Stated rate of interest Cash interest paid

Explanation / Answer

Amounts to be reported on Dec 31, 2014 in the following situations are:

PAR : Issue price $125000

Interest expense = $125000 * 10% = $12500

Bonds payable = $125000

Unamortized premium or discount = $0

Net liability = $125000

Stated rate of interest = 10%

Cash interest paid = $12500

At Discount i.e. @$98

Issue Price = $98/100 * 125000 = $122500, Discount = $125000 - $122500 = $2500

Discount to be amortized at each interest period = $2500 * 1/2 * 1/10 = $125

Interest expense = ($125000 * 10%) + ($125*2) = $12500 + $250 = $12750

Bonds payable = Face Value - Unamortized Discount = $125000 - $2250 = $122750

Unamortized premium or discount = $2500 - $250 = $2250

Net liability = $125000

Stated rate of interest = 10%

Cash interest paid = $12500

At Premium i.e. @$109

Issue Price = $109/100 * 125000 = $136250, Premium = $136250 - $125000 = $11250

Premium to be amortized at each interest period = $11250 * 1/2 * 1/10 = $562.50

Interest expense = ($125000 * 10%) - ($562.50*2) = $12500 - $1125 = $11375

Bonds payable = Face Value + Unamortized Premium = $125000 + $10125 = $135125

Unamortized premium = $11250 - $1125 = $10125

Net liability = $125000

Stated rate of interest = 10%

Cash interest paid = $12500

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