Question

E10-15 (Algo) Preparing a Bond Amortization Schedule for a Bond Issued at a Premium and Determining Reported Amounts LO10-5 On January 1 of this year, Houston Company issued a bond with a face value of $17,500 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. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Round your final answers to whole dollars.) Required: 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? Year 1 Year 2 December 31 Interest expense Bond liability

Answer 1

	principal			17,500
	interest paid			875
	principal use PV of $1 at 4% for 3 years
	17500	*	0.889	=	15558
	for interest use PV of ordinary annuity
	875	*	2.77509	=	2428
	Issue price of bonds				17986
1)	Date		Cash	interest	premium	Book value
			interest	Expense	amortized	of bond
				4%
	jan 1, year 1					17986
	Dec 31,year 1		875	719	156	17830
	dec 31,year 2		875	713	162	17668
	Dec 31,year 3		875	707	168	17500
2)	31-Dec		Year 1	Year 2
	interest expense		719	713
	bond liability		17830	17668