Question

On January 1, 2018, Reese Incorporated issued bonds with a face value of $300,000, 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 $312,300. Reese used the effective interest rate method to amortize bond premium.

Required

1. Prepare an amortization table.
2. What item(s) in the table would appear on the 2020 balance sheet?
3. What item(s) in the table would appear on the 2020 income statement?
4. What item(s) and amount in the table would appear on the 2020 statement of cash flows (Direct Method) and under what section the bond liability appear?

	Amortization Schedule Cash Payment Interest Expense Premium Amortization Carrying Value January 1, 2018 312,300 December 31, 2018 24,000 21,861 2,139 310,161 December 31, 2019 24,000 December 31, 2020 24000 December 31, 2021 24,000 December 31, 2022 24000   Totals 120,000 107,699 12,300

b. What item(s) in the table would appear on the 2020 balance sheet?
c. What item(s) in the table would appear on the 2020 income statement?
d. What item(s) and amount in the table would appear on the 2020 statement of cash flows (Direct Method) and under what section the bond liability appear?

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	b. Carrying value Bond Liabilities c. d.

Answer 1

Solution a:

Amortization table Date Cash payment Interest expense Premium amortized Carrying value 01-Jan-18 $312,300 31-Dec-18 $24,000 $21,861 $2,139 $310,161 31-Dec-19 $24,000 $21,711 $2,289 $307,872 31-Dec-20 $24,000 $21,551 $2,449 $305,423 31-Dec-21 $24,000 $21,380 $2,620 $302,803 31-Dec-22 $24,000 $21,196 $2,803 $300,000 9 10 11 12 13 14 20 21 22 26 27 28 29 30 31 33 34 35 36 38 40 42 44 45 et962 Sheet35 (13) ) Sheet980 Sheet986 Sheet399 (3)

Solution b, c and d:

12 AK AR 13 14 15 16 carrying value of bond 305423 Interest expense Cash payment of interest 21551 -24000 Operating activities 21 22 23 25 26 27 28 29 30 33 34 35 36 37 38 39 40 42 43 44 45 46 et962 Sheet35 (13) Sheet980 Sheet986 Sheet399 (3)