Question

On January 1, Year 1, Young Company issued bonds with a face value of $108,000, a stated rate of interest of 10 percent, and a 10-year term to maturity. Interest is payable in cash on December 31 of each year. The effective rate of interest was 9 percent at the time the bonds were issued. The bonds sold for $114,931. Young used the effective interest rate method to amortize the bond premium. Required a. Determine the amount of the premium on the day of issue. b. Determine the amount of interest expense recognized on December 31, Year 1. (Round your answer to the nearest dollar amount.) c. Determine the carrying value of the bond liability on December 31, Year 1.

Answer 1

Answer:

Premium on the issue is $6,931

Bond interest expense is $10,343.79

Bond carrying value is $114,474.79

Explanation:

The premium on the day of issue is the bonds' cash proceeds less the face value.

Cash proceeds is $114,931

Face value is $108,000

Premium =$114,931-$108,000=$6,931

Interest expense at December year one is the cash proceeds from the bondholders multiplied by the bond yield to maturity of 9% as shown below

interest expense=$114,931*9%=$10,343.79  

The bond carrying value at the end of the year is the cash proceeds plus the interest expense less coupon payment as below:

Carrying value=$114,931+$10,343.79-($108,000*10%)=$114,474.79  

Answer 2

Answer:

a) $ 6,931 premium on bonds payable

b) interest expense $ 10.343,79‬

c) carrying value $ 114.474,79

Explanation:

 114,931 issuance proceeds

108,000 face value

  6,931   premium on bonds payable

under effective interetst method the interest expense is calculate by doing carrying value x market rate:

114,931 x 9% = 10.343,79‬

Then, the difference against the cash outlay isdepreicaiton on the bond:

108,000 x 10% = 10,800

amortization: 10,800 - 10,343.79 = 456,21‬

Carrying value: 114,931 - 456.21 = 114.474,79