4) E10-10 Preparing a Bond Amortization Schedule for a Bond Issued at a Discount

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4)

E10-10 Preparing a Bond Amortization Schedule for a Bond Issued at a Discount and Determining Reported Amounts LO10-4 On January 1 of this year, Ikuta Company issued a bond with a face value of $180,000 and a coupon rate of 4 percent. The bond matures in 3 years and pays interest every December 31. When the bond was issued, the annual market rate of interest was 5 percent. Ikuta uses the effective-interest amortization method. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Round your final answer to whole dollars.) Required 1. Complete a bond amortization schedule for all three years of the bond's life Cash Interest Interest Expense Discount Amortization Book Value of Bond Date Jan. 01, Year 1 Dec. 31, Year 1 Dec. 31, Year 2 Dec. 31, Year 3 2. What amounts will be reported on the income statement and balance sheet at the end of Year 1 and Year 2? December 31 Interest expense Bond liability Year 1 Year 2

Explanation / Answer

ISSUE PRICE: Present value of Interest of $ 7200 for 3 years at 5% 19607.4 ($ 7200 with Annuity factor of year3 at 5% i.e. 2.7232) Present value of maturity value of $ 180,000 at end of Year-3 155491.2 ($ 180,000 * PVF of Year-3 at 5% i.e. 0.8638) Issue price of bonds 175099 Req 1. Amortization schedule: Date Cash Interest Discount Book value of Interest Expense Amortization Bonds Jan 1 Year 1 175099 Dec 31 Year1 7200 8755 1555 176654 Dec 31 Year2 7200 8832 1632 178286 Dec 31 Year3 7200 8914 1714 180000 Req 2 Year 1 Yyear2 Interest expense 8755 8832 Bond liability 176654 178286

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