Question

Hi, I tried many times to get the answers for this question. Can someone please help me. In number 1, insurance of bonds for 200 000 is wrong. Really need help. Thank you

12/31/2019 200 000 2. What amounts will be reported on the financial statements (statement of financial position, statement of earnings, and statement of cash flows) for 2017, 2018, and 2019? (Round intermediate and final answers to the nearest whole dollar.) 2017 2018 2019 Interest expense Bonds payable Interest payment Issuance of bonds Payment of bonds 200 000 References eBook & Resources Learning Objective: 10-03 Report bonds payable and interest sold at par, at a discount, or at a premium. Worksheet E 10-14 Preparing a Debt Payment Schedule with the Effective-Interest Method of Amortization, and Determining Reported Amounts LO10-3

Answer 1

$2,500,000 8.00% Step 1 Calculation of issue price of bond Face Value Stated Rate Coupon Payment Market Rate Maturity Period Annually 7.00% Coupon payment frequency Coupon Rate consider for calculation 8.00% Coupon Payment $200,000 [$2500000 x 8%] 7.00% Market Rate Consider for Calculation Period Present Value of Coupon Payments Present Value of Annuity of $1 period 3 and rate 7% Present Value of Coupon Payments (A) 2.6243 $524,860 [$200000 x 2.6243] Present Value of Maturity Value Present Value of $1 period 3 and rate 7% Present Value of Maturity Value (B) 0.81630 $2,040,750 [$2500000 x 0.8163] Present Value of Bond = Present Value of Coupon Payment + Present Value of Maturity Value Present Value of Bond [(A) + (B)] Issue price of the Bond $2,565,610 $2,565,610

Ans 1 The effective interest rate is also called as market rate. It is the investor's yield maturity. When the effective interest rate is higher/Lower as compared bond coupon rate then, the bonds were issued at a discount/premium. The Discount/Premium is then amortised over the period of bond by using effective interest rate method. Under this method, interest expense is derived by multiplying the bond carrying value with the effective interest rate applicable when the bonds were issued. The difference between the interest expense and actual interest paid is the discount/premium which will be amortised. Bond Payment Schedule Date Cash Payment Interest Expense Amortisation of Premium Carrying Value 1/1/2017 $2,565,610 12/31/2017 $200,000 $2565610 x(7%)] $179,593 ($200000-$179593] $20,407 $2,545,203 12/31/2018 $200,000 [$2545203 x(7%)] $178,164 ($200000-$178164] $21,836 $2,523,367 12/31/2019 $200,000 ($2523367 x(7%)] $176,633 $200000-$176633] $23,367 $2,500,000 2019 $176,633 Ans 2 Interest Expense Bonds Payable Interest Payment Issuance of Bonds Payment of Bonds 2017 $179,593 $2,545,203 $200,000 $2,565,610 2018 $178,164 $2,523,367 $200,000 $200,000 $2,500,000