Question

On January 1, 2018, Reese Incorporated issued bonds with a face value of $240,000, a stated...

On January 1, 2018, Reese Incorporated issued bonds with a face value of $240,000, 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 7 percent at the time the bonds were issued. The bonds sold for $249,840. Reese used the effective interest rate method to amortize bond premium.

Required

  1. Prepare an amortization table.
  2. What item(s) in the table would appear on the 2020 balance sheet?
  3. What item(s) in the table would appear on the 2020 income statement?
  4. What item(s) and amount in the table would appear on the 2020 statement of cash flows (Direct Method) and under what section the bond liability appear?
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Homework Answers

Answer #1

Face Value of Bonds = $240,000
Issue Value of Bonds = $249,840

Annual Coupon Rate = 8.00%
Annual Coupon = 8.00% * $240,000
Annual Coupon = $19,200

Time to Maturity = 5 years
Annual Interest Rate = 7.00%

Answer a.

Answer b.

Carrying Value Bond Liabilities = $244,339

Answer c.

Interest Expense = $17,241

Answer d.

Interest Expense = $19,200

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