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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:

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 f14fb9fe2fbb047_1
12/31/17	$fill in the blank f14fb9fe2fbb047_2	$fill in the blank f14fb9fe2fbb047_3	$fill in the blank f14fb9fe2fbb047_4	fill in the blank f14fb9fe2fbb047_5
12/31/18	fill in the blank f14fb9fe2fbb047_6	fill in the blank f14fb9fe2fbb047_7	fill in the blank f14fb9fe2fbb047_8	fill in the blank f14fb9fe2fbb047_9
12/31/19	fill in the blank f14fb9fe2fbb047_10	fill in the blank f14fb9fe2fbb047_11	fill in the blank f14fb9fe2fbb047_12	fill in the blank f14fb9fe2fbb047_13
12/31/20	fill in the blank f14fb9fe2fbb047_14	fill in the blank f14fb9fe2fbb047_15	fill in the blank f14fb9fe2fbb047_16	fill in the blank f14fb9fe2fbb047_17
12/31/21	fill in the blank f14fb9fe2fbb047_18	fill in the blank f14fb9fe2fbb047_19	fill in the blank f14fb9fe2fbb047_20	fill in the blank f14fb9fe2fbb047_21
Totals	$fill in the blank f14fb9fe2fbb047_22	$fill in the blank f14fb9fe2fbb047_23	$fill in the blank f14fb9fe2fbb047_24

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

Interest expense	$fill in the blank 2d5cd2016071fec_1
Cash interest payment	$fill in the blank 2d5cd2016071fec_2
Premium amortization	$fill in the blank 2d5cd2016071fec_3

Feedback

A discount or premium represents the difference between the face value and the issuance price of the bond. Bonds are issued at premium when the market rate of interest is less than the face rate.

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

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

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.

Balance Sheet

Income Statement

Stockholders'

Net

Assets

=

Liabilities

+

Equity

Revenues

Expenses

=

Income

Bond PayableCashInterest ExpenseInterest PayablePrepaid InterestNo EntryBond Payable

fill in the blank b5971a015031027_2

Bond PayableInterest ExpenseInterest PayablePremium on Bonds PayablePrepaid InterestNo EntryPremium on Bonds Payable

fill in the blank b5971a015031027_4

fill in the blank b5971a015031027_5

Bond PayableCashInterest ExpenseInterest PayablePrepaid InterestNo EntryNo Entry

fill in the blank b5971a015031027_7

Bond ExpenseBond PayableInterest ExpensePremium on Bonds PayablePrepaid InterestNo EntryNo Entry

fill in the blank b5971a015031027_9

fill in the blank b5971a015031027_10

Feedback

Partially correct

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 payableBonds payable	$Bonds payable
Discount on bonds payablePremium on bonds payableInterest expenseInterest payablePremium on bonds payable	Premium on bonds payable
	$fill in the blank 0fd2ba07d022f82_5