Question

Victor Company issued bonds with a $250,000 face value and a 6% stated rate of interest on January 1, 2016. The bonds carried a 5-year term and sold for 95. Victor uses the straight-line method of amortization. Interest is payable on December 31 of each year.

A)The carrying value of the bond liability on the January 1, 2016 would be?

B) The amount of interest expense appearing on the December 31, 2016 would be?

C) The carrying value of the bond liability on December, 31, 2021 would be?

D) The sale of the asset on December 31, 2021 would be?

E) The amount of cash outflow for interest expense in 2018 would be?

Answer 1

Requirement A:

The carrying value of the bond liability on the January 1, 2016 = Face value x 0.95 = $250,000 x 0.95 = $237,500

Requirement B:

Discount amortized each year [Straight-line] = (Face value - Cash received) ÷ 5 years

= (250,000-237,600)/5

=$12,500/5

=$2,500

Cash interest paid = Face value x Stated rate

= $250,000 x 6%

= $15,000

The amount of interest expense appearing on the December 31, 2016 = Discount amortized + Cash interest paid

= $2,500 + $15,000

=$17,500

Requirement C:

At maturity date, Face value = Carrying value. Thus,

The carrying value of the bond liability on December, 31, 2021 = $250,000

Requirement D:

The sale of the asset on December 31, 2021 would be? Irrelevant question

Requirement E:

Cash interest to be paid each year = Face value x Stated rate

= $250,000 x 6%

= $15,000

Thus,

The amount of cash outflow for interest expense in 2018 = $15,000