Impact of a Premium

Reagan Enterprises sold 20-year bonds on January 1, 2016. The face value of the bonds was $100,000, and they carry a 9% stated rate of interest, which is paid on December 31 of every year. Reagan received $109,320 in return for the issuance of the bonds when the market rate was 8%. Any premium or discount is amortized using the effective interest method premium or discount is amortized using the effective interest method.

Required:

1. Prepare the journal entry to record the sale of the bonds on January 1, 2016. How does this entry affect the accounting equation? Indicate the effect on financial statement items by selecting "" for decrease (or negative effect), "+" for increase (or positive effect) and "NE" for No Entry (or no effect) on the financial statement.

Journal

Balance Sheet

Income Statement

Stockholders

Net

Date

Description

Debit

Credit

Assets

=

Liabilities

+

Equity

Revenues

Expenses

=

Income

2016 Jan. 1

Cash

Premium on bonds payable

Bonds payable

Prepare a proper balance sheet presentation for January 1, 2016.

Reagan Enterprises
Balance Sheet (Partial)
January 1, 2016
	$
	$

2. Prepare the journal entry to record interest expense on December 31, 2016. How does this entry affect the accounting equation? If required, round your answers to the nearest dollar. 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.

Journal

Balance Sheet

Income Statement

Stockholders

Net

Date

Description

Debit

Credit

Assets

=

Liabilities

+

Equity

Revenues

Expenses

=

Income

2016 Dec. 31

Prepare a proper balance sheet presentation for December 31, 2016.

Reagan Enterprises
Balance Sheet (Partial)
December 31, 2016
	$
	$

3. Why was the company able to issue the bonds for $109,320 rather than for the face amount?

The is lower than the . Therefore, investors will be willing to pay more on the basis of the future cash flows discounted at the .

FOR THE JOURNAL ENTRIES TELL WHEATHER IT INCREASE DECREASE, NO EFFECT IN ASSETS LIABILITIES EQUITY REVENUE EXPENSE NET INCOME