10.00 points Santa Corporation issued a bond on January 1 of this year with a fa

Question

10.00 points Santa Corporation issued a bond on January 1 of this year with a face value of $1,000. The bond's coupon rate is 7 percent and interest is paid once a year on December 31. The bond matures in three years. The annual market rate of interest was 10 percent at the time the bond was sold. The following amortization schedule pertains to the bond issued: Paid Expense January 1, Year 1 $10 $93 $23 Required 1. What was the bond's issue price? 2. Did the bond sell at a discount or a premium? How much was the premium or discount? 3. What amount(s) should be shown on the balance sheet for bonds payable at the end of Year 1 and Year 2 4. Show how the following amounts were computed for Year 2: (a) $70, (b) $95, (c) $25, and (d) $973. (Enter percentages in decimals.) 973

Explanation / Answer

Answer 1. Issue Price of Bond                      925 Answer 2. Bond is issued at discount Discount Amount = $1,000 (Face Value) - $925 (Issue Price) Discount Amount = $75 Answer 3. End of Year 1 Bonds Payable                  1,000 Discount on Issue of Bond (75 - 23)                        52                  948 End of Year 2 Bonds Payable                  1,000 Discount on Issue of Bond (75 - (23 + 25)                        27                  973 Answer 4. Interest Paid - Cash Paid = $1,000 (Bond Face Value) X 7% (Interest Rate) = $70 Interest Expenses = $948 (Bond Carrying Value) X 10% (Market Interest rate) = $95 Bond Amortization = $95 (Interest Expenses) - $70 (Interest Paid) = $25 Bond Carrying Value = $1,000 (Face Value) - ($23 + $25) = $973

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