Final answer:
To set up a schedule of interest expense and discount amortization under the straight-line method for Jason Allen company's bonds, calculate the total interest expense and the discount amortization over the life of the bond. The schedule would be as follows: Year 1: Interest Expense = $227,337.50, Discount Amortization = $35,325. Year 2: Interest Expense = $223,515.00, Discount Amortization = $35,325. Year 3: Interest Expense = $219,692.50, Discount Amortization = $35,325. Year 4: Interest Expense = $215,870.00, Discount Amortization = $35,325. Year 5: Interest Expense = $212,047.50, Discount Amortization = $35,325.
Step-by-step explanation:
To set up a schedule of interest expense and discount amortization under the straight-line method, we need to calculate the total interest expense and the discount amortization over the life of the bond. Since the bond has a maturity value of $2,450,000 and is sold for $2,273,375, the discount is $176,625 ($2,450,000 - $2,273,375). The bond has a maturity of 5 years, so the annual discount amortization is $35,325 ($176,625 / 5).
The interest expense can be calculated by multiplying the carrying value of the bond at the beginning of each year by the market interest rate. In this case, the carrying value at the beginning of each year can be calculated by subtracting the discount amortization from the maturity value. Assuming a market interest rate of 10%, the interest expense for each year would be:
Year 1: $2,273,375 * 10% = $227,337.50
Year 2: ($2,273,375 - $35,325) * 10% = $223,515.00
Year 3: ($2,273,375 - 2*$35,325) * 10% = $219,692.50
Year 4: ($2,273,375 - 3*$35,325) * 10% = $215,870.00
Year 5: ($2,273,375 - 4*$35,325) * 10% = $212,047.50
Thus, the schedule of interest expense and discount amortization under the straight-line method would be as follows:
Year 1: Interest Expense = $227,337.50, Discount Amortization = $35,325
Year 2: Interest Expense = $223,515.00, Discount Amortization = $35,325
Year 3: Interest Expense = $219,692.50, Discount Amortization = $35,325
Year 4: Interest Expense = $215,870.00, Discount Amortization = $35,325
Year 5: Interest Expense = $212,047.50, Discount Amortization = $35,325