Question

On January 1, Year 1, Reese Incorporated issued bonds with a face value of $270,000, a stated rate of interest of 8 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 7 percent at the time the bonds were issued. The bonds sold for $281,070. Reese used the effective interest rate method to amortize bond premium.

Required

Prepare an amortization table. What item in the table would appear on the Year 3 balance sheet? What item in the table would appear on the Year 3 income statement? What item and amount in the table would appear on the Year 3 statement of cash flows (Direct Method) and under which section of the statement of cash flows would this item appear?

Complete this question by entering your answers in the tabs below.

• Req A
• Req B to D

b. What item in the table would appear on the Year 3 balance sheet?
c. What item in the table would appear on the Year 3 income statement?
d. What item and amount in the table would appear on the Year 3 statement of cash flows (Direct Method) and under which section of the statement of cash flows would this item appear?

Answer 1

a)	Amortization schedule
		Cash	Interest	Premium	Carrying
		Payment	Expenses	Amortization	Value($)
	Year 1 (Beginning )				281070
	Year 1 (end)	21600	19675	1925	279145
	Year 2	21600	19540	2060	277085
	Year 3	21600	19396	2204	274881
	Year4	21600	19242	2358	272523
	Year5	21600	19077	2523	270000
	Totals	108000	96930	11070

Cash payment : 270000*8% = $21600

Interest expenses : 281070* 7 % = $19675

Premium Amortization = Cash payment - Interest expense = 21600 - 19675 = $1925

b)	Balance Year 3
	Bonds payable (Gross)	$270000
	Add: Unamortised premium	$4881
	(274881-270000)
	Bonds value	$274881

Note : Labilities will be shown under long term liabilities section of total liabilities

c) Income statement (year 3)

Income Expenses ( debited ) : $19396

d) Cash flow statement ( year 3 )

Cash flow from operating activity :

Interest Paid $21600