Question

On 1/1/10, R-U Ready issued $100,000, 6.5%, 10-year bonds at an effective rate of 4.75%. Interest is paid annually on 12/31 of each year.

Edit:

Present the accounts and dollar amounts that would appear on comparative balance sheets and income statements for the years ending 12/31/16 and 12/31/15.

Answer 1

Bonds face value is given as $100,000, with coupon payment as 6.5%, but effective rate is only 4.75%
i.e. bonds is issued at a premium that can be calculated as follows:
FV	$100,000
PMT	6,500	(100,000 x 6.5%)
Rate	4.75%	effective rate as given
NPER	10
PV	($113,678.61)
	=PV(4.75%,10,6500,100000)
So bond is issued at a premium of $13,678.61 above face value of $100,000
Now , we will make its amortization table
Amortization Table
Year	Coupon payment	Interest Expense	Premium amortization	Carrying value
1/1/10				$113,678.61
12/31/10	6,500	5,399.73	1,100.27	112,578.34
12/31/11	6,500	5,347.47	1,152.53	111,425.82
12/31/12	6,500	5,292.73	1,207.27	110,218.54
12/31/13	6,500	5,235.38	1,264.62	108,953.92
12/31/14	6,500	5,175.31	1,324.69	107,629.23
12/31/15	6,500	5,112.39	1,387.61	106,241.62	Bal needed
12/31/16	6,500	5,046.48	1,453.52	104,788.10	Bal needed
12/31/17	6,500	4,977.43	1,522.57	103,265.53
12/31/18	6,500	4,905.11	1,594.89	101,670.65
12/31/19	6,500	4,829.36	1,670.64	100,000.00
			13,678.61
Hint for first row
6500 = 100000 x 6.5%
5399.73 = 113678.61 x 4.75%
1100.27 = 6500-5399.73
112578.34 = 113678.61 - 1100.27
Other rows are calculated similarly
	Balance Sheet				Income Statement
					Period Ending	Period Ending
Class: Account	12/31/16	12/31/15		Class: Account	12/31/16	12/31/15
Long term liabilities:				Interest Expense	5,046.48	5,112.39
Bonds Payable	$      100,000	$                  100,000
Add: Premium on Bonds Payable	4,788.10	6,241.62
	$ 104,788.10	$             106,241.62
Calculation as per amortization table