Question

On January 1, Year 1, Parker Company issued bonds with a face value of $77,000, a stated rate of interest of 8 percent, and a five-year term to maturity. Interest is payable in cash on December 31 of each year. The effective rate of interest was 10 percent at the time the bonds were issued. The bonds sold for $71,162. Parker used the effective interest rate method to amortize the bond discount. (Round your intermediate calculations and final answers to the nearest whole dollar amount.)
Required
a. Prepare an amortization table. Date Cash Payment Interest Expense Discount Amortization Carrying Value 71,162 72,118 6,1607 ,116 January 1, Year 1 December 31, Year 1 December 31, Year 2 December 31, Year 3 December 31, Year 4 December 31, Year 5 Totals 6,1607 ,116
b. What is the carrying value that would appear on the Year 4 balance sheet?
c. What is the interest expense that would appear on the Year 4 income statement?
d. What is the amount of cash outflow for interest that would appear in the operating activities section of the Year 4 statement of cash flows? b. Carrying value
c. Interest expense
d. Cash outflow for interest

Answer 1

Answer: See explanation

Explanation:

a. Prepare an amortization table.

The ammortization table has been prepared and attached.

Note that:

Cash paid = $77000 × 7%

Interest expense was calculated as:

= Last year’s Bond Carrying value × 10%

Discount ammortization = Interest Expense - Cash Paid

b. What is the carrying value that would appear on the Year 4 balance sheet?

The carrying value will be $75600.

c. What is the interest expense that would appear on the Year 4 income statement?

The interest expense will be $7433.

d. What is the amount of cash outflow for interest that would appear in the operating activities section of the Year 4 statement of cash flows?

The cash outflow for interest be $6160.

Carrying Value = $75600

Interest Expense = $7433

Cash Outflow for Interest = $6160