Amortization of Premium

Ortega Company issued five-year, 5% bonds with a face value of $50,000 on January 1, 2017. Interest is paid annually on December 31. The market rate of interest of January 1, 2017, is 4% and the proceeds from the bond issuance equal $52,227.

Required:

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1. Prepare a five-year table to amortize the premium using the effective interest method. Enter all amounts as positive numbers. Round all amounts to the nearest whole dollar.

*Note: Due to rounding you will have to adjust the interest expense for 12/31/21 so the carrying value equals $50,000.

Ortega Company Premium Amortization Effective Interest Method of Amortization

Date	Cash Interest 5%	Interest Expense 4%	Premium Amortized	Carrying Value
1/01/17				$fill in the blank b826e2f9ffbd03a_1
12/31/17	$fill in the blank b826e2f9ffbd03a_2	$fill in the blank b826e2f9ffbd03a_3	$fill in the blank b826e2f9ffbd03a_4	fill in the blank b826e2f9ffbd03a_5
12/31/18	fill in the blank b826e2f9ffbd03a_6	fill in the blank b826e2f9ffbd03a_7	fill in the blank b826e2f9ffbd03a_8	fill in the blank b826e2f9ffbd03a_9
12/31/19	fill in the blank b826e2f9ffbd03a_10	fill in the blank b826e2f9ffbd03a_11	fill in the blank b826e2f9ffbd03a_12	fill in the blank b826e2f9ffbd03a_13
12/31/20	fill in the blank b826e2f9ffbd03a_14	fill in the blank b826e2f9ffbd03a_15	fill in the blank b826e2f9ffbd03a_16	fill in the blank b826e2f9ffbd03a_17
12/31/21	fill in the blank b826e2f9ffbd03a_18	fill in the blank b826e2f9ffbd03a_19	fill in the blank b826e2f9ffbd03a_20	fill in the blank b826e2f9ffbd03a_21
Totals	$fill in the blank b826e2f9ffbd03a_22	$fill in the blank b826e2f9ffbd03a_23	$fill in the blank b826e2f9ffbd03a_24

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2. What is the total interest expense over the life of the bonds? cash interest payment? premium amortization?

Interest expense	$fill in the blank 4cfc65ffa00f007_1
Cash interest payment	$fill in the blank 4cfc65ffa00f007_2
Premium amortization	$fill in the blank 4cfc65ffa00f007_3

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3. Identify and analyze the effect of the payment of interest on December 31, 2019 (the third year).

Activity	FinancingInvestingInvesting and FinancingOperating
Accounts	Cash Increase, Premium on Bonds Payable Decrease, Interest Expense IncreaseCash Increase, Premium on Bonds Payable Decrease, Interest Expense DecreaseCash Decrease, Premium on Bonds Payable Decrease, Interest Expense IncreaseCash Decrease, Premium on Bonds Payable Decrease, Interest Expense Decrease
Statement(s)	Balance Sheet onlyBalance Sheet and Income StatementIncome Statement only

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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.

Balance Sheet

Income Statement

Stockholders'

Net

Assets

=

Liabilities

+

Equity

Revenues

Expenses

=

Income

Bond PayableCashInterest ExpenseInterest PayablePrepaid InterestNo Entry

fill in the blank 8fb30ffb1fe5012_2

Bond PayableInterest ExpenseInterest PayablePremium on Bonds PayablePrepaid InterestNo Entry

fill in the blank 8fb30ffb1fe5012_4

fill in the blank 8fb30ffb1fe5012_5

Bond PayableCashInterest ExpenseInterest PayablePrepaid InterestNo Entry

fill in the blank 8fb30ffb1fe5012_7

Bond ExpenseBond PayableInterest ExpensePremium on Bonds PayablePrepaid InterestNo Entry

fill in the blank 8fb30ffb1fe5012_9

fill in the blank 8fb30ffb1fe5012_10

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Prepare the balance sheet presentation of the bonds on December 31, 2019 (the third year).

Ortega Company Balance Sheet (Partial) December 31, 2019

Bonds payableDiscount on bonds payableInterest payablePremium on bonds payable	$- Select -
Discount on bonds payablePremium on bonds payableInterest expenseInterest payable	- Select -
	$fill in the blank 90949f08201302f_5