Question

On January 1 of this year, Houston Company issued a bond with a face value of $19,000 and a coupon rate of 5 percent. The bond matures in 3 years and pays interest every December 31. When the bond was issued, the annual market rate of interest was 4 percent. Houston uses the effective-interest amortization method. (Use the appropriate factor(s) from the tables provided. Round your final answers to whole dollars.

1. Complete a bond amortization schedule for all three years of the bond's life. (Enter all values as positive values.)

Date	Cash Interest	Interest Expense	Amortization	Book Value of Bond
Jan. 01, Year 1
Dec. 31, Year 1
Dec. 31, Year 2
Dec. 31, Year 3

2. What amounts will be reported on the income statement and balance sheet at the end of Year 1 and Year 2?

December 31	Year 1	Year 2
Interest Expense
Bond Liability

Answer 1

Calculations:

Coupon payment = $19,000 x 5% = $950

Present value of the face value	$16,891
[$19,000 x 0.88899 present value factor (3 years, 4%]
Present value of the coupon payment	$2,636
[$950 x 2.77509 present value annuity factor (3 years, 4%)]
Bond issue price	$19,527

Requirement 1:

Amortization table:

Date	Cash interest	Interest expense	Amortization	Book value of the bond
Jan. 01, Year 1				$19,527
Dec.31, Year 1	$950	$781	$169	$19,358
Dec.31, Year 2	$950	$774	$176	$19,183
Dec.31, Year 3	$950	$767	$183	$19,000

Cash interest = coupon payment

Interest expense = Preceding book value of the bond x 4% market rate

Amortization = Cash interest - interest expense

Book value of the bond = Preceding balance - Amortization

Requirement 2:

December 31	Year 1	Year 2
Interest expense	$781	$774
Bond liability (Bond's carrying value)	$19,358	$19,183