Chapter 7, Problem 20E

a.

To determine

Indicate the event that affects the balance sheet, income statement, and statement of cash flows and indicate whether the increases (+), decreases (-), or does not affect (NA) each element of the financial statements.

Explanation of Solution

Income statement:

Income statement is a financial statement that shows the net income or net loss by deducting the expenses from the revenues and vice versa.

Balance Sheet:

Balance sheet summarizes the assets, the liabilities, and the stockholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Statement of cash flows

The financial statement that shows the changes in cash flows from operating, investing, and financing activities is referred to as statement of cash flows.

Indicate the event that affects the balance sheet, income statement, and statement of cash flows and also indicate whether the increases (+), decreases (-), or does not affect (NA) each element of the financial statements as follows:

Table (1)

b.

To determine

Ascertain the carrying value (face value less discount or plus premium) of the bond liability as of December 31, year 2014.

Explanation of Solution

Bonds

Bonds are a kind of interest bearing notes payable, usually issued by companies, universities and governmental organizations. It is a debt instrument used for the purpose of raising fund of the corporations or governmental agencies. If selling price of the bond is equal to its face value, it is called as par on bond. If selling price of the bond is lesser than the face value, it is known as discount on bond. If selling price of the bond is greater than the face value, it is known as premium on bond.

Straight-line amortization bond

Straight line method of amortization is a process of amortizing premium on bond or discount on bond, which allocates the same amount of interest expense in each period of interest payment.

Ascertain the carrying value (face value less discount or plus premium) of the bond liability as of December 31, year 2014 as follows:

Particulars	$
Bonds payable	300,000
Add: Premium on bonds payable (4)	4,050
Carrying value of the bond at December 31, Year 2014	304,050

Table (2)

Therefore, the carrying value of the bond at December 31, year 2014 is $304,050.

Working note 1: Calculate the premium rate:

$\begin{array}{c}\text{Premium rate = }\frac{\left(\begin{array}{l}\text{Issued price per bond}-\\ \text{Par value per bond}\end{array}\right)}{\text{Par value per bond}}\times 100\\ =\frac{\left(\text{\$101}\text{.5}-\$100\right)}{\$100}\times 100\\ =\frac{\$1.5}{\$100}\times 100\\ =1.5\%\end{array}$

Working note 2: Calculate the value of premium:

$\begin{array}{c}\text{Bond premium = Issuance cost}\times \text{Premium rate (1) }\\ \text{= \$300,000}\times \frac{1.5}{100}\\ =\$4,500\end{array}$

Working note 3: Calculate bond premium amortized during the current year:

$\begin{array}{c}\begin{array}{l}\text{Bond premium amortized }\\ \text{during the current year}\end{array}\}\text{ = }\frac{\text{Bond premium (2)}}{\text{Time period}}\\ =\frac{\$4,500}{\text{10 years}}\\ =\$450\end{array}$

Working note 4: Calculate the premium on bonds payable at the end of the 2014:

$\begin{array}{c}\begin{array}{l}\text{Premium on bonds payable}\\ \text{ at the end of the year}\end{array}\}=\left[\begin{array}{l}\text{Bond premium (2) }-\\ \left(\begin{array}{l}\text{Bond premium amortized }\\ \text{during the current year (3)}\end{array}\right)\end{array}\right]\\ =\$4,500-\$450\\ =\$4,050\end{array}$

c.

To determine

Calculate the interest expense paid during the year 2014.

Explanation of Solution

Interest Expense: The cost of debt which is incurred during a particular accounting period is called interest expense. The interest amount is a fixed interest rate payable on the principal amount of debt. 

Calculate the interest expense paid during the year 2014 as follows:

Particulars	$
Interest expense (5)	18,000
Less: Bond premium amortized during the current year 1 (3)	(450)
Interest expense paid during the current year 2014	17,550

Table (3)

Therefore, the interest expense paid during the current year is $17,550.

Working note 5: Calculate the value of interest expense:

$\begin{array}{c}\text{Interest expense = Principal amount }\times \text{Interest rate}\times \text{Time period}\\ \text{=}\text{\$300,000}\times \frac{\text{6}}{100}\times \frac{12}{12}\\ \text{=}\text{\$18,000}\end{array}$

d.

To determine

Ascertain the carrying value (face value less discount or plus premium) of the bond liability as of December 31, year 2015.

Explanation of Solution

Ascertain the carrying value (face value less discount or plus premium) of the bond liability as of December 31, year 2015 as follows:

Particulars	$
Bonds payable	300,000
Add: Premium on bonds payable (7)	3,600
Carrying value of the bond at December 31, Year 2015	303,600

Table (4)

Therefore, the carrying value of the bond at December 31, year 2015 is $303,600.

Working note 6: Calculate bond premium amortized during the current year:

$\begin{array}{c}\begin{array}{l}\text{Bond premium amortized }\\ \text{during the current year}\end{array}\}\text{ = }\frac{\text{Bond premium (2)}}{\text{Time period}}\\ =\frac{\$4,500}{\text{10 years}}\\ =\$450\end{array}$

Working note 7: Calculate the premium on bonds payable at the end of the year 2015:

$\begin{array}{c}\begin{array}{l}\text{Premium on bonds payable}\\ \text{ at the end of the year 2017}\end{array}\}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Premium on bond payable }\\ \text{at the end of the year 1 (4)}\end{array}\right)-\\ \left(\begin{array}{l}\text{Bond premium amortized }\\ \text{during the current year (6)}\end{array}\right)\end{array}\right]\\ =\$4,050-\$450\\ =\$3,600\end{array}$

e.

To determine

Calculate the interest expense paid during the year 2015.

Explanation of Solution

Calculate the interest expense paid during the year 2015:

Particulars	$
Interest expense (5)	18,000
Less: Bond premium amortized during the current year 2014 (6)	450
Interest expense paid during the current year 2015	17,550

Table (5)

Therefore, the interest expense paid during the current year 2015 is $17,550.