Co. issued $ 180,000 of 15-year, 7 percent bonds purteht bonds willow aercise 10

ID: 2514054 • Letter: C

Question

Co. issued $ 180,000 of 15-year, 7 percent bonds purteht bonds willow aercise 10-14A casted rate of Required ?y 10-14A Straight-line amortization of a bond discont any issued S180,000 face value of bonds on January 1,2016. The bonds had a 7 percent terest and a five-year term. Interest is paid in cash annually, beginning 6.he bonds were issued at 98. The straight-line method is used for amortization and Use a financial statements model like the one shown below to demonstrate how (1) the Janu- ary l. 2016, bond issue and (2) the December 31, 2016, recognition of interest expense, in- luding the amortization of the discount and the cash payment, affect the company's financial statements. Use + for increase,--for decrease, and NA for not affected. Event o AssetsLiab. Equity Rev. Exp. = Net Inc. Cash Flow

Explanation / Answer

Bond Issuance at discount recording:

Cash A/c Dr. $176,400

Discount on Bonds Payable A/c Dr. $3,600

To Bonds Payable $180,000

Interest payments:

Bond Interest Expense Dr. 12,600

To Discount on Bonds payable $720

To Cash $11,880

Answer (a)

On Balance sheet, Bonds are treated as Liability, along with the unamortized discount is subtracted (known as contra entry).

Balance Sheet

USD

Current Assets :

Cash (Bond Issuance)

176,400

Less: Interest payments

-11,880

164,520

Long Term Liabilities:

Total

Bonds Payable

180,000

Less: Unamortized discount on Bonds

- 3,600

Carrying Value of Bond

176400

Income Statement Per Year

USD

Interest Expense (Cash Paid Plus Discount Amortization)

12,600

Cash Flow Statement:

Cash Flow From Operating activities:

Interest Expenses

Cash Flow from Financing activities:

Amortized portion of bond discount

Answer (b)

In the question, Total Face value of Bonds is $ 180,000.

Bond issued at $ 98.

By doing cross multiplication, you get total carrying amount as:

180,000 * 98/100 = $176,400

Answer (c)

Total interest reported in 2016:

180,000*7% = 12600