Question

1. On January 1 of this year, Ikuta Company issued a bond with a face value of $130,000 and a coupon rate of 4 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 5 percent. Ikuta uses the effective-interest amortization method. (Use the appropriate factor(s) from the tables provided. Round your answers to whole dollars.)

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
Bonds Payable

Answer 1

Face Value of Bonds = $130,000

Annual Coupon Rate = 4.00%
Annual Coupon = 4.00% * $130,000
Annual Coupon = $5,200

Time to Maturity = 3 years
Annual Interest Rate = 5%

Issue Value of Bonds = $5,200 * PVA of $1 (5%, 3) + $130,000 * PV of $1 (5%, 3)
Issue Value of Bonds = $5,200 * 2.72325 + $130,000 * 0.86384
Issue Value of Bonds = $126,460

Date Jan. 01, Year 1 Dec. 31, Year 1 Dec. 31, Year 2 Dec. 31, Year 3 Book Value of Cash Interest Interest Expense Amortization Bond 126,460 $ 5,200 $ 6,323 $ 1,123 $ 127,583 $ 5,200 $ 6,379 $ 1,179 $ 128,762 $ 5,200 $ 6,438 $ 1,238 $ 130,000 December 31 Interest Expense Bonds Payable $ $ Year 1 6,323 $ 127,583 $ Year 2 6,379 128,762