Amortization of Premium Stacy Company issued five-year, 10% bonds with a face va
ID: 2742693 • Letter: A
Question
Amortization of Premium
Stacy Company issued five-year, 10% bonds with a face value of $10,000 on January 1, 2014. Interest is paid annually on December 31. The market rate of interest of January 1, 2014, is 8% and the proceeds from the bond issuance equal $10,799.
Required:
1. Prepare a five-year table (similar to Exhibit 10-5) to amortize the premium using the effective interest method. Enter all amounts as positive numbers. If required, round all calculations and final answers to the nearest dollar.
*Note: Due to rounding you will have to adjust the interest expense DOWN to the nearest dollar 12/31/18.
Stacy Company
Premium Amortization
Effective Interest Method of Amortization
Date
Cash Interest 10%
Interest Expense 8%
Premium Amortized
Carrying Value
1/01/14
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
Totals
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 and the amortization of premium on December 31, 2016 (the third year)
How does this entry affect the accounting equation?
If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.
Determine the balance sheet presentation of the bonds on December 31, 2016.
Stacy Company
Balance Sheet (Partial)
December 31, 2016
1. Prepare a five-year table (similar to Exhibit 10-5) to amortize the premium using the effective interest method. Enter all amounts as positive numbers. If required, round all calculations and final answers to the nearest dollar.
*Note: Due to rounding you will have to adjust the interest expense DOWN to the nearest dollar 12/31/18.
Stacy Company
Premium Amortization
Effective Interest Method of Amortization
Date
Cash Interest 10%
Interest Expense 8%
Premium Amortized
Carrying Value
1/01/14
$12/31/14
$ $ $12/31/15
12/31/16
12/31/17
12/31/18
Totals
$ $ $Explanation / Answer
1. Prepare a five-year table (similar to Exhibit 10-5) to amortize the premium using the effective interest method. Enter all amounts as positive numbers. If required, round all calculations and final answers to the nearest dollar. *Note: Due to rounding you will have to adjust the interest expense DOWN to the nearest dollar 12/31/18. Stacy Company Premium Amortization Effective Interest Method of Amortization Date Column1 Column2 Column3 Column4 Date Cash Interest 10% ($10,000 x10%) Interest Expense 8% (Carrying value x 8% Premium Amortized (column-1 -column 2) Carrying Value 1/1/14 $10,799 12/31/14 $1,000 $863.92 $136.08 $10,662.92 12/31/15 $1,000 $853.03 $146.97 $10,515.95 12/31/16 $1,000 $841.28 $158.72 $10,357.23 12/31/17 $1,000 $828.58 $171.42 $10,185.81 12/31/18 $1,000 $814.86 $185.14 $10,000.67 Total $5,000 $4,201.67 $798.33 2. What is the total interest expense over the life of the bonds? cash interest payment? premium amortization? Interest expense $4,201.67 Cash interest payment $5,000 Premium amortized $798.33
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