Question

Exercise 10-17A Straight-line amortization of a bond premium LO 10-5 Stuart Company issued bonds with a $150,000 face value on January 1, Year 1. The bonds had a 6 percent stated rate of interest and a five-year term. Interest is paid in cash annually, beginning December 31, Year 1. The bonds were issued at 103. The straight-line method is used for amortization. Required a. Use a financial statements model like the one shown next to demonstrate how (1) the January 1, Year 1, bond issue and (2) the December 31, Year 1, recognition of interest expense, including the amortization of the premium and the cash payment, affect the company's financial statements. Use + for increase or for decrease. (In the Cash Flow column, use the initials OA to designate operating activity, IA for investing activity, and FA for financing activity. Columns for events that have no effect on any of the elements should be left blank.) Effect of Transactions on Financial Statements Balance Sheet Income Statement Stockholders' Equity Event No. Assets = Liabilities + Statement of Cash Flow Revenue - Expense - Net Income 1111 2b +

Answer 1

Face value of bonds	$ 1,50,000
Issue price (150000*103/100)	$ 1,54,500
Preimum on bonds issued	$        4,500
Amortization per year (4500/5)	$           900

Effect of transactions on the financial statement

Balance Sheet

Income Statement

Event No.

Assets

=

Liabilities

+

Stakeholders' equity

Revenue

-

Expenses

=

Net Income

Statement of cashflow

1

+

=

+

+

-

=

FA

+

2a.

=

-

+

-

-

+

=

-

2b.

-

=

-

+

-

=

FA

-

Bond schedule
Period	Interest payment @ 6%	Premium amortization	Interest expense	Closing balance
Jan 1. year 1				$        1,54,500
December 31, year 1	$        9,000	$               900	$           8,100	$        1,53,600
December 31, year 2	$        9,000	$               900	$           8,100	$        1,52,700
December 31, year 3	$        9,000	$               900	$           8,100	$        1,51,800
December 31, year 4	$        9,000	$               900	$           8,100	$        1,50,900
December 31, year 5	$        9,000	$               900	$           8,100	$        1,50,000

Carrying value Decemeber 31, year 1	$ 1,53,600
Interest expense year 1	$ 8,100
Carrying value Decemeber 31, year 2	$ 1,52,700
Interest expense year 2	$ 8,100