Amortization of Premium Ortega Company issued five-year, 5% bonds with a face va
ID: 2573801 • Letter: A
Question
Amortization of Premium Ortega Company issued five-year, 5% bonds with a face value of $50,000 on January 1, 2017. Interest is paid annually on December 31. The market rate of interest of January 1, 2017, is 4% and the proceeds from the bond issuance equal $52,227. Required:
1. Prepare a five-year table to amortize the premium using the effective interest method. Enter all amounts as positive numbers. Round all amounts to the nearest whole dollar. *Note: Due to rounding you will have to adjust the interest expense for 12/31/21 so the carrying value equals $50,000.
2. What is the total interest expense over the life of the bonds? cash interest payment? premium amortization?
3. Identify and analyze the effect of the payment of interest on December 31, 2019 (the third year).
Prepare the balance sheet presentation of the bonds on December 31, 2019 (the third year)
Explanation / Answer
1-
date
cash paid = 50000*5%
interest expense = carrying value*4%
premium amortized = cash paid - interest expense
carrying value of premium on bonds payable = carrying value-premium amortized
bonds payable
carrying value of bonds = bonds payable+carrying value of bonds amortized
Jan 1 2017
2227
50000
52227
Dec 31 2017
2500
2089.08
410.92
1816.08
50000
51816.08
dec 31 2018
2500
2072.643
427.3568
1388.723
50000
51388.72
dec 31 2019
2500
2055.549
444.4511
944.2721
50000
50944.27
dec 31 2020
2500
2037.771
462.2291
482.043
50000
50482.04
Dec 31 2021
2500
2017.957
482.043
0
50000
50000
2-
Amount of total interest expense
10273
Amount of cash paid
12500
amount of premium amortized
2227
3-
Balance sheet
liabilities and shareholders equity
bond payable
50000
premium on bonds payable
944.2721
50944.27
1-
date
cash paid = 50000*5%
interest expense = carrying value*4%
premium amortized = cash paid - interest expense
carrying value of premium on bonds payable = carrying value-premium amortized
bonds payable
carrying value of bonds = bonds payable+carrying value of bonds amortized
Jan 1 2017
2227
50000
52227
Dec 31 2017
2500
2089.08
410.92
1816.08
50000
51816.08
dec 31 2018
2500
2072.643
427.3568
1388.723
50000
51388.72
dec 31 2019
2500
2055.549
444.4511
944.2721
50000
50944.27
dec 31 2020
2500
2037.771
462.2291
482.043
50000
50482.04
Dec 31 2021
2500
2017.957
482.043
0
50000
50000
2-
Amount of total interest expense
10273
Amount of cash paid
12500
amount of premium amortized
2227
3-
Balance sheet
liabilities and shareholders equity
bond payable
50000
premium on bonds payable
944.2721
50944.27
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