Assume the same set of facts for Stacy Company as in Problem 10-2 except that the market rate of interest of January 1, 2008, is 8% and the proceeds from the bond issuance equal $10,803.
1. Prepare a five year table (similar to Exhibit 10-5) to amortize the premium using 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 the bonds on the date.
Solution is provided in a separate Excel file attached in the following parts.
1 Data provided
Maturity Value of Bonds $10,000
Contract interest rate 10%
Interest paid annually $1,000.00
Effective Rate of interest 8%
Issue price $10,803
Journal entry at the date of issuance:
Details Debit Credit
Bonds payable $10,000
Premium on Bonds payable $803
(To issue 10%,5 year Bonds at premium)
1 schedule of interest expense and bond amortization for 2008-2012
2 Answers to Question 2
Total interest Expense over life of the bond $4,197
Total cash interest payment $5,000
The solution discusses the amortization of premium.