Question

Exercise 10-20A Effective interest amortization of a bond discount LO

On January 1, Year 1, Parker Company issued bonds with a face value of $58,000, a stated rate of interest of 7 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 9 percent at the time the bonds were issued. The bonds sold for $53,488. Parker used the effective interest rate method to amortize the bond discount. (Round your intermediate calculations and final answers to the nearest whole dollar amount.)

Required
a. Prepare an amortization table.

	Date Cash Payment Interest Expense Discount Amortization Carrying Value January 1, Year 1 53,488 December 31, Year 1 4,060 4,814 754 54,242 December 31, Year 2 December 31, Year 3 December 31, Year 4 December 31, Year 5 Totals 4,060 4,814 754

b. What is the carrying value that would appear on the Year 4 balance sheet?
c. What is the interest expense that would appear on the Year 4 income statement?
d. What is the amount of cash outflow for interest that would appear in the operating activities section of the Year 4 statement of cash flows?

	b. Carrying value c. Interest expense d. Cash outflow for interest

Answer 1

a. Amortization table
Date	Cash payment	Interest expense	Discount Amortization	Carrying value of bonds
	($58,000*7%)	Previous year carrying value of	(Interest expense -	Previous year's carrying value of bonds
		bond*effective rate of interest 9%	Cash payment )	+ current year's discount amortized
January 1, Year 1	-	-	-	$53,488
December 31, Year 1	$4,060	$4,814	$754	$54,242
December 31, Year 2	$4,060	$4,882	$822	$55,064
December 31, Year 3	$4,060	$4,956	$896	$55,960
December 31, Year 4	$4,060	$5,036	$976	$56,936
December 31, Year 5	$4,060	$5,124	$1,064	$58,000
Totals	$20,300	$24,812	$4,512
b. Carrying value
Carrying value that would appear on the year 4 balancesheet is $56,936
c. Interest expense
Interest expense that would appear on the year 4 Income statement is $5,036
d. Cash outflow for interest
Cash outflow for interest that would appear on year 4 cash flow statement is $4,060
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