On January 1 of this year, Houston Company issued a bond with a face value of $1

Question

On January 1 of this year, Houston Company issued a bond with a face value of $19,500 and a coupon rate of 6 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. Houston 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. (Enter all values as positive values.) Cash Interest Premium Book Value Date Bond 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

1.

Book value of bonds on Jan 01, Year 1

= (Annual Interest payment x PVA5%,3) + (Face value x PV5%,3)

= ($19500 x 6% x 2.72325) + ($19500 x 0.86384)

= $20031

2.

Date Cash
Interest Interest
Expense Premium
Amortization Book Value of
Bond Jan 01, Year 1 $20031 Dec 31, Year 1 1170 1002 168 19863 Dec 31, Year 2 1170 993 177 19686 Dec 31, Year 3 1170 984 186 19500

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