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) for 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) for 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, 2018.

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, 2018:

Particulars	$
Bonds payable	200,000
Add: Premium on bonds payable	3,600
Carrying value of the bond at December 31, Year 1	203,600

Table (2)

Therefore, the carrying value of the bond at December 31, 2018 is $203,600.

Working notes:

Calculate the premium rate.

$\begin{array}{c}\text{Premium rate = }\frac{\left(\begin{array}{l}\text{Issued price per bond}-\\ \text{Par value per bond}\end{array}\right)}{\text{Par value per bond}}\times 100\\ =\frac{\left(\text{\$102}-\$100\right)}{\$100}\times 100\\ =\frac{\$2}{\$100}\times 100\\ =2\%\end{array}$

Calculate the value of premium.

$\begin{array}{c}\text{Bond premium = Issuance cost}\times \text{Premium rate }\\ \text{= \$200,000}\times \frac{2}{100}\\ =\$4,000\end{array}$

Calculate bond premium amortized during 2018.

$\begin{array}{c}\begin{array}{l}\text{Bond premium amortized }\\ \text{during 2018}\end{array}\}\text{ = }\frac{\text{Bond premium }}{\text{Time period}}\\ =\frac{\$4,000}{\text{10 years}}\\ =\$400\end{array}$

Calculate the premium on bonds payable at the end of 2018.

$\begin{array}{c}\begin{array}{l}\text{Premium on bonds payable}\\ \text{ at the end of 2018}\end{array}\}=\left[\begin{array}{l}\text{Bond premium }-\\ \left(\begin{array}{l}\text{Bond premium amortized }\\ \text{during 2018 }\end{array}\right)\end{array}\right]\\ =\$4,000-\$400\\ =\$3,600\end{array}$

c.

To determine

Calculate the amount of interest expense reported on the 2018 income statement.

Explanation of Solution

Calculate the interest expense reported on the 2018 income statement.

Particulars	Amount ($)
Interest expense	12,000
Less: Bond premium amortized during 2018	400
Interest expense paid in 2018	11,600

Table (3)

Therefore, the interest expense reported on the 2018 income statement is $11,600.

Working note:

Calculate the value of interest expense

$\begin{array}{c}\text{Interest expense = Principal amount }\times \text{Interest rate}\times \text{Time period}\\ \text{=}\text{\$200,000}\times \frac{\text{6}}{100}\times \frac{12}{12}\\ \text{=}\text{\$12,000}\end{array}$

d.

To determine

Ascertain the carrying value of the bond liability as of December 31, 2019.

Explanation of Solution

Ascertain the carrying value of the bond liability as of December 31, 2019.

Particulars	$
Bonds payable	200,000
Add: Premium on bonds payable	3,200
Carrying value of the bond at December 31, Year 2	203,200

Table (4)

Therefore, the carrying value of the bond liability as of December 31, 2019 is $203,200.

Working note:

Calculate bond premium amortized during 2018.

$\begin{array}{c}\begin{array}{l}\text{Bond premium amortized }\\ \text{during 2019}\end{array}\}\text{ = }\frac{\text{Bond premium }}{\text{Time period}}\\ =\frac{\$4,000}{\text{10 years}}\\ =\$400\end{array}$

Calculate the premium on bonds payable at the end of the 2019.

$\begin{array}{c}\begin{array}{l}\text{Premium on bonds payable}\\ \text{ at the end of 2019}\end{array}\}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Premium on bond payable }\\ \text{at the end of 2018 }\end{array}\right)-\\ \left(\begin{array}{l}\text{Bond premium amortized }\\ \text{during 2019 }\end{array}\right)\end{array}\right]\\ =\$3,600-\$400\\ =\$3,200\end{array}$

e.

To determine

Calculate the amount of interest expense reported on the 2019 income statement.

Explanation of Solution

Calculate the interest expense reported on the 2018 income statement.

Particulars	Amount ($)
Interest expense	12,000
Less: Bond premium amortized during 2019	400
Interest expense paid in 2019	11,600

Table (5)

Therefore, the interest expense reported on the 2019 income statement is $11,600.

Working note:

Calculate the value of interest expense

$\begin{array}{c}\text{Interest expense = Principal amount }\times \text{Interest rate}\times \text{Time period}\\ \text{=}\text{\$200,000}\times \frac{\text{6}}{100}\times \frac{12}{12}\\ \text{=}\text{\$12,000}\end{array}$