Exercise 7-20A (Algo) Straight-line amortization of a bond premium LO 7-9

The Square Foot Grill, Inc. issued $199,000 of 10-year, 7 percent bonds on January 1, Year 1, at 102. Interest is payable in cash annually on December 31. The straight-line method is used for amortization.

Required

a. Use a financial statements model to demonstrate how (1) the January 1, Year 1, bond issue and (2) the December 31, Year 1, recognition of interest expense, including the amortization of the premium and the cash payment, affects the company's financial statements. Use + for increase, - for decrease, and if there is no effect, leave the cell blank. (In the Cash Flow column, indicate whether the item is an operating activity (OA), an investing activity (IA), or a financing activity (FA) and if there is no effect, leave the cell blank. Not all cells will require entry.)

b. Determine the carrying value (face value less discount or plus premium) of the bond liability as of December 31, Year 1.

c. Determine the amount of interest expense reported on the Year 1 income statement.

d. Determine the carrying value of the bond liability as of December 31, Year 2.

e. Determine the amount of interest expense reported on the Year 2 income statement.