Amortizing a Discount Ortega Company issued five-year, 5% bonds with a face valu

Question

Amortizing a Discount 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 on this date is 8%, and Ortega Company receives proceeds of $44,011 on the bond issuance. Required: 1. Prepare a five-year table to amortize the discount using the effective interest method. Round the last calculation as needed to bring bond to value. 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 12/31/21.

2. What is the total interest expense over the life of the bonds? cash interest payment? discount amortization?

3. Identify and analyze the effect of the payment of interest on December 31, 2019 (the third year)

Determine the balance sheet presentation of the bonds on December 31, 2019.

Explanation / Answer

Answer 1 Discount amortization table Date Interest payment (5% of Bond Payable) Interest Expense (8% of Previous book value) Amortization of bond discount Debit balance in Bond Discount Credit balance in Bonds Payable Book value of the bond Jan.1,2017 $5,989 $50,000 $44,011 Dec.31,2017 $2,500 $3,521 $1,021 $4,968 $50,000 $45,032 Dec.31,2018 $2,500 $3,603 $1,103 $3,866 $50,000 $46,134 Dec.31,2019 $2,500 $3,691 $1,191 $2,675 $50,000 $47,325 Dec.31,2020 $2,500 $3,786 $1,286 $1,389 $50,000 $48,611 Dec.31,2021 $2,500 $3,889 $1,389 $0 $50,000 $50,000 $12,500 $18,489 $5,989 Answer 2 Total interest expense over the life of the bonds = $18,489 Cash Interest Payment = $12500 Discount amortization = $5989 Answer 3 Journal Entry as on December 31, 2019 - Third Interest payment Date Account Titles Debit Credit Dec.31,2019 Interest Expense $3,691.00 Discount Bonds Payable $1,191.00 Cash $2,500.00 Balance sheet presentation of the bonds on December 31, 2019. Ortega Company Balance Sheet as on 31st December, 2019 (Partial) Liabilities and Equity Long term debt Bonds Payable (Gross) $50,000.00 Less : Discount on bonds payable $2,675.00 $47,325.00

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