Question

The Square Foot Grill, Inc. issued $200,000 of 10-year, 6 percent bonds on January 1, 2018, at 102. Interest is payable in cash annually on December 31. The straight-line method is used for amortization. Required Use a financial statements model like the one shown below to demonstrate how (1) the January 1, 2018, bond issue and (2) the December 31, 2018, recognition of interest expense, including the amortization of the premium and the cash payment, affects the company’s financial statements. Use + for increase, − for decrease, and if there is no effect, leave the cell blank. Determine the carrying value (face value less discount or plus premium) of the bond liability as of December 31, 2018. Determine the amount of interest expense reported on the 2018 income statement. Determine the carrying value of the bond liability as of December 31, 2019. Determine the amount of interest expense reported on the 2019 income statement.

Answer 1

Answer:

Cash       204,000 debit

  Bond Payable   200,000 credit

 Premium on BP     4,000 credit

--to record issuance--

interest expense  11,600   debit

premium BP              400  debit

      cash                            12,000 credit

--Dec 31th 2018 --

Balance sheet:

Liabilities: Bonds payable Carrying value: 203,600

Income statement: interest expense 11,600

cash flow statement: financing activities interest paid 12,000

==================================================

interest expense  11,600   debit

premium BP              400  debit

      cash                            12,000 credit

--Dec 31th 2019 --

Balance sheet:

Liabilities: Bonds payable Carrying value: 203,200

Income statement: interest expense 11,600

cash flow statement: financing activities interest paid 12,000

Explanation:

proceeds 204,000

face value 200,000

premium on bonds payable 4,000

amortization: premium/payment

4,000 / 10 = 400

200,000 x 6% = 12,000 cash proceed (cash flow)

amortization on premium 400

interest expense 12,000 - 400 = 11,600 (income statement)

as this is a straigh-line method each entry is the same.