Amortization of Discount Stacy Company issued five-year, 10% bonds with a face value of $10,000 on January 1, 2017. Interest is paid annually on December 31. The market rate of interest on this date is 12%, and Stacy Company receives proceeds of $9,279 on the bond issuance. Required: Refer to the tables above for present value factors. 1. Prepare a five-year table to amortize the discount using the effective interest method. Note: Round the 12/31/18 interest expense and discount amortized up to the nearest dollar. For all other computations, follow normal rounding to the nearest dollar. Enter all amounts as positive numbers. Stacy Company Discount Amortization Effective Interest Method of Amortization Date Cash Interest 10% Interest Expense 12% Discount Amortized Carrying Value 1/01/17 $ 12/31/17 $ $ $ 12/31/18 12/31/19 12/31/20 12/31/21 Totals $ $ $ Feedback Face rate of interest is the amount of interest that will be paid on the bonds as indicated in the bond contract. Determine the interest expense. Determine Discount Amortized. Add the amortized discount to carrying value for new carrying value. 2. What is the total interest expense over the life of the bonds? cash interest payment? discount amortization? Total interest expense $ Cash interest payment Discount amortization $ Feedback A discount or premium represents the difference between the face value and the issuance price of the bond. Bonds are issued at a discount when the market rate of interest exceeds the face rate. 3. Identify and analyze the effect of the payment of interest and the amortization of discount on December 31, 2019 (the third year). Activity Operating Accounts Cash Decrease, Discount on Bonds Payable Decrease, Interest Expense Increase Statement(s) Balance Sheet and Income Statement Feedback Identify and analyze the transaction by using the following steps: 1. Determine activity operating, investing or financing. 2. Determine accounts affected and the amount of increases/decreases. 3. Determine the financial statements affected balance sheet, income statement. The accounting equation must balance for each transaction. Bonds are recorded on the balance sheet at an amount that takes into account the premium or discount associated with the bonds on the date they are issued. Bond premiums represent amounts paid in excess of par, and bond discounts represent amounts paid below par value. A premium or discount represents the difference between the face value and the issuance price of the bond. A discount is a deduction to the bonds payable liability and thus is a contra-liability. A premium is an addition to the bonds payable liability on the balance sheet. How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item. Balance Sheet Income Statement Stockholders' Net Assets = Liabilities + Equity Revenues Expenses = Income Cash Discount on Bonds Payable No Entry 0 Interest Expense Feedback Partially correct Determine the balance sheet presentation of the bonds for December 31, 2019. Stacy Company Balance Sheet (Partial) December 31, 2019 Bonds payable $ Discount on bonds payable $ Feedback Discounts and premiums are adjustments to the bonds payable account on the balance sheet. Feedback Partially correct