Question

Amortization of Discount

Stacy Company issued five-year, 10% bonds with a face value of $10,000 on January 1, 2017. Interest is paid annually on December 31. The market rate of interest on this date is 12%, and Stacy Company receives proceeds of $9,279 on the bond issuance.

Required:

Refer to the tables above for present value factors.

1. Prepare a five-year table to amortize the discount using the effective interest method.

Note: Round the 12/31/18 interest expense and discount amortized up to the nearest dollar. For all other computations, follow normal rounding to the nearest dollar. Enter all amounts as positive numbers.

Stacy Company
Discount Amortization
Effective Interest Method of Amortization
Date	Cash Interest 10%	Interest Expense 12%	Discount Amortized	Carrying Value
1/01/17				$
12/31/17	$	$	$
12/31/18
12/31/19
12/31/20
12/31/21
Totals	$	$	$

2. What is the total interest expense over the life of the bonds? cash interest payment? discount amortization?

Total interest expense	$
Cash interest payment
Discount amortization	$

3. Identify and analyze the effect of the payment of interest and the amortization of discount on December 31, 2019 (the third year).

Activity	Operating
Accounts	Cash Decrease, Discount on Bonds Payable Decrease, Interest Expense Increase
Statement(s)	Balance Sheet and Income Statement

How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item.

Balance Sheet

Income Statement

Stockholders'

Net

Assets

=

Liabilities

+

Equity

Revenues

–

Expenses

=

Income

Cash

Discount on Bonds Payable

No Entry

Interest Expense

Determine the balance sheet presentation of the bonds for December 31, 2019.

Stacy Company
Balance Sheet (Partial)
December 31, 2019
Bonds payable	$
Discount on bonds payable
	$

Answer 1

Part 1

Stacy Company Discount Amortization Effective Interest Method of Amortization
Date	Cash interest (10%)	Interest expense (12%)	Discount amortized	Carrying value
1/01/17				9279
12/31/17	1000	1113	113	9392
12/31/18	1000	1127	127	9519
12/31/19	1000	1142	142	9661
12/31/20	1000	1159	159	9820
12/31/21	1000	1180	180	10000
Totals	5000	5721	721

Cash interest = 10000*10%

Interest expense = previous carrying value * 12%

Discount amortized = interest expense – cash interest

Carrying value = previous carrying value + discount amortized

Part 2

Total interest expense	$5721
Cash interest payment	$5000
Discount amortized	$721

Part 3

	Balance sheet	Income statement
December 31, 2019	Assets	=	Liabilities	+	Stockholder’s Equity	Revenues	-	Expenses	=	Net income
	Cash -1000		Discount on bonds payable 142		-1142			Interest expense 1142		-1142

Part 4

Stacy Company Balance Sheet (Partial) December 31, 2019
Bonds payable	$10000
Less: Discount on bonds payable	339
	$9661