Question

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.

Prepare a proper balance sheet presentation for 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.

Prepare a proper balance sheet presentation for 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