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10-3 Amoritzation of Premium on Bonds for Stacy Company

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Stacy Company issued five year, 10% bond with a face value of 10,000 on Janurary 1,2008. Interest is paid annually on December 31st. The market rate of interest on this date is 8% and Stacy Company receives proceeds of 10,803 on bond insurance.

1. Prepare a five year table to amortize the premium using the effective interest method.
2. What is the total interest expense over the life of the bonds? cash interest payment? premium amortization?
3. Identify and analyze the effect of the payment of interest and the amortization of premium on December 31,2010 (the third year) and determine the balance sheet presentation of he bonds on that date.

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Solution Summary

The solution prepares a five year table to amortize the premium using the the effective interest method (see attachment).

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