Question

Analyzing a Bond Amortization Scheduale: Reporting Bonds Payable

Stein Corporation issued a $1,000 bond on January 1, 2017. The bond specified an interest rate of 9 percent payable at the end of each year. The bond matures at the end of 2019. It was sold at a market rate of 11 percent per year. The following sceduale was completed:

	Cash Paid	Interest Expense	Amoritization	Carrying Amount
January 1, 2017 (issuance)				$ 951
End of Year 2017	?	$ 105	$ 15	966
End of year 2018	?	106	16	982
End of year 2019	?	108	18	1,000

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 of cash was paid each year for bond interest?

4. What amount of interest expense should be shown each year on the statement of earnings?

5. What amount(s) should be shown on the statement of finiancialposition for bonds payable at each year-end? (For 2019, show the balance just before repayment of the bond.)

6. what method of amortization was used?

7. Show how the following amounts were computed for 2018: (a) $106, (b) $16, and (c) $982.

8. Is the method of amoritizationthat was used preferable? Explain why.

Answer 1

Q1.
Issue price: $ 951
Q2.
Total Discount on bonds: 1000-951 = 49
Q3.
Interest paid in cash: 105-15 = 90
Q4.
Interest expense for the year:
2017	105
2018	106
2019	108
Q5.
Bonds payable Liability at end of 2019 (before payment)
Bonds payable (Gross)			1000
Less: Unamortized Discount			18
Bonds payable (Net)			982
Q6.
Effective Interest Method.
Q7.
Book value of Bonds in Beginning of 2018				966
Interest expense at 11% (966*11%)				106
Cash interest to be paid (1000*9%)				90
Discount amortized				16
Book value at the end of 2018				982
Req 8.
Effective Interest method used is preferable for the reason that the interest is computed on effective book value at the beginning of each year.