Determining Financial Statement Effects for Bond Issue and First Interest Payment with Premium (Straight-Line Amortization)
Denver Corporation sold a $300.000. 6 percent bond issue on January 1, 2011. at a market rate of 3 percent. The bonds were dated January 1,2011, with interest to be paid each December 31; they mature in 10 years. The company uses the straight-line method to amortize any discount or premium.
Required:
1. How are the financial statements affected by the issuance of the bonds? Describe the impact on the debt-to-equity and times interest earned ratios, if any.
2. How are the financial statements affected by the payment of interest on December 31 ? Describe the impact on the debt-to-equity and times interest earned ratios, if any.
3. Show how the bond interest expense and the bonds payable should be reported on the December 31. 2011. annual financial statements.
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