Question

On January 1, Year 1, Mudpond Company issued bonds with a $400,000 face value, a stated rate of interest of 5%, and a 10-year term to maturity. The bonds sold for $432,444. Mudpond uses the effective interest method to amortize bond discounts and premiums. The market rate of interest on the date of issuance was 4%. Interest is paid annually on December 31.

REQUIRED:

1. Complete the amortization schedule below:

2. 	Cash Payment	Interest Expense	Amortization	Carrying Value
   1/1/Year 1
   12/31/Year 1
   12/31/Year 2

1. Prepare journal entries to record:
   1. Issuance of bonds on January 1, Year 1.
   2. Payment of interest on December 31, Year 1.
   3. Payment of interest on December 31, Year 2.   

2. Show the impact of these events on the horizontal financial statement model

Answer 1

Amortization schedule
Year	Cash payment	Interest Exp	Amortization	Carrying value
1/1/Year 1				432,444
12/31/Year 1	20,000	17,298	2,702	429,742
12/31/Year 2	20,000	17,190	2,810	426,931

Account Titles and Explanation	Debit ($)	Credit ($)
Cash	432,444
Premium on Bond Payable		32,444
Bond Payable		400,000
[Issuance of bonds on January 1, Year 1]
Interest Expenses	17,298
Premium on Bond Payable	2,702
Cash		20,000
[Payment of interest on December 31, Year 1]
Interest Expenses	17,190
Premium on Bond Payable	2,810
Cash		20,000
[Payment of interest on December 31, Year 1]