Question

On January 1, 2017, Riverbed Company issued $ 1,930,000 face value,  9%,  10-year bonds at $ 2,059,503. This price resulted in a  8% effective-interest rate on the bonds. Riverbed uses the effective-interest method to amortize bond premium or discount. The bonds pay annual interest on each January 1.

Prepare the journal entries to record the following transactions. (Round answers to 0 decimal places, e.g. 125. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

1.		The issuance of the bonds on January 1, 2017.
2.		Accrual of interest and amortization of the premium on December 31, 2017.
3.		The payment of interest on January 1, 2018.
		4. Accrual of interest and amortization of the premium on December 31, 2018. No. Date Account Titles and Explanation Debit Credit 1. Jan. 1, 2017 2. Dec. 31. 2017 3. Jan. 1, 2018 4. Dec. 31, 2018 Show the proper long-term liabilities balance sheet presentation for the liability for bonds payable at December 31, 2018. (Round answers to 0 decimal places, e.g. 125.) Partial Balance Sheet (mm/dd/yyyy) ______ ______ $____ Add/Less _____ $____ $______ Provide the answers to the following questions. 1. What amount of interest expense is reported for 2018? (Round answer to 0 decimal places, e.g. 125.) Interest expense to be reported $ 2. The bond interest expense reported in 2018 would be (greater than/less than/same as) the amount that would be reported if the straight-line method of amortization were used.

Answer 1

Below table shows the amortization of premium and interest expense for the two years.

Period		Beginning carrying value	Interest expense	Interest paid	Premium amortisation	Ending carrying value	Balance premium
Year	Month end	A	C= A* 8.00%	D	E=C-D	F=A+E
2017	12.00	2,059,503	164,760	173,700	8,940	2,050,563	120,563
2018	12.00	2,050,563	164,045	173,700	9,655	2,040,908	110,908

Entries:

No	Date		Account		Debit	Credit
1	Jan.1	2017	Cash		2,059,503
			Premium on bonds payable			129,503
			Bonds payable			1,930,000
2	Dec.31	2017	Interest expense		164,760
			Premium on bonds payable		8,940
			Interest payable			173,700
3	Jan.1	2018	Interest payable		173,700
			Cash			173,700
4	Dec.31	2018	Interest expense		164,045
			Premium on bonds payable		9,655
			Interest payable			173,700

Partial balance sheet:

Partial balance sheet (12/31/2018)
Long-term liabilities
Bonds payable	1,930,000
Add: premium on bonds payable	110,908	2,040,908

Interest expense for 2018 = 164,045

2

Bond interest expense reported in 2018 would be less than the amount that would be reported if the straight-line method of amortization is used.