Problem 10-30A: Straight-line amortization of a bond discount LO 10-4
During Year 1 and Year 2, Agatha Corp. completed the following transactions relating to its bond issue. The corporation's fiscal year is the calendar year.
Year 1
Jan. 1
Issued $330,000 of 10-year, 7 percent bonds for $318,000. The annual cash payment for interest is due on December 31.
Dec. 31
Recognized interest expense, including the straight-line amortization of the discount, and made the cash payment for interest.
Dec. 31
Closed the interest expense account.
Year 2
Dec. 31
Recognized interest expense, including the straight-line amortization of the discount, and made the cash payment for interest.
Dec. 31
Closed the interest expense account.
Required:
a-1. When the bonds were issued, was the market rate of interest more or less than the stated rate of interest?
a-2. If Agatha had sold the bonds at their face amount, what amount of cash would Agatha have received?
b. Prepare the liabilities section of the balance sheet at December 31, Year 1 and Year 2.
c. Determine the amount of interest expense that will be reported on the income statements for Year 1 and Year 2.
d. Determine the amount of interest that will be paid in cash to the bondholders in Year 1 and Year 2.