On January 1, 2018, Reese Incorporated issued bonds with a face value of $160,00

Question

On January 1, 2018, Reese Incorporated issued bonds with a face value of $160,000, a stated rate of interest of 8 percent, and a five- year term to maturity. Interest is payable in cash on December 31 of each year. The effective rate of interest was 7 percent at the time the bonds were issued. The bonds sold for $166,560. Reese used the effective interest rate method to amortize bond premium. Required a. Prepare an amortization table b. What item(s) in the table would appear on the 2020 balance sheet? c. What item(s) in the table would appear on the 2020 income statement? d. What item(s) and amount in the table would appear on the 2020 statement of cash flows (Direct Method) and under what section the bond liability appear?

Explanation / Answer

(a) Amortization Schedule (a) (b) (c) (d) Cash Payment Interest Expense (effective interest rate = 7%) Premium Amortization Carrying Value [Previous year cayying value X 7%] (a) - (b) [Previous year cayying value - (c)] January 1, 2018 $ 1,66,560 December 31, 2018 $      12,800 $       11,659 $    1,141 $ 1,65,419 December 31, 2019 $      12,800 $       11,579 $    1,221 $ 1,64,199 December 31, 2020 $      12,800 $       11,494 $    1,306 $ 1,62,892 December 31, 2021 $      12,800 $       11,402 $    1,398 $ 1,61,495 December 31, 2022 $      12,800 $       11,305 $    1,495 $ 1,60,000 Totals $      64,000 $       57,440 $    6,560 Computation of Carrying Value: Item appreared on 2020: (b) Carrying value of bond liabilities (Balancesheet) = $   1,62,892 (c) Interest Expense (Income Statement) = $       11,494 (d) Interest Expense (Statement of Cash flows) = $       12,800 operating Activities

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