Question

on january 1, year 1, young company issued bonds with a face value of $114,000, a stated rate of interest of 16 percent, and a 10-year term to maturity. interest is payable in cash on december 31 of each year. the effective rate of interest was 15 percent at the time the bonds were issued. the bonds sold for $119,721. young used the effective interest rate method to amortize the bond premium. required a. determine the amount of the premium on the day of issue. b. determine the amount of interest expense recognized on december 31, year 1. (round your answer to the nearest dollar amount.) c. determine the carrying value of the bond liability on december 31, year 1. (round your answer to the nearest dollar amount.)

Answer 1

a. The premium on the day of issue is $5,721. b. The interest expense recognized on December 31, year 1, is $17,958. c. The carrying value of the bond liability on December 31, year 1, is $101,763.

Step-by-step explanation:

a. To determine the amount of premium on the day of issue, we subtract the face value of the bonds ($114,000) from the sale price ($119,721): $119,721 - $114,000 = $5,721. So, the premium on the day of issue is $5,721.

b. To determine the amount of interest expense recognized on December 31, year 1, we multiply the carrying value of the bond liability at the beginning of the year by the effective interest rate. The carrying value of the bond liability at the beginning of the year is the face value of the bonds ($114,000) plus the premium ($5,721) from part a: $114,000 + $5,721 = $119,721. The interest expense is $119,721 × 15% = $17,958.15 (rounded to the nearest dollar).

c. To determine the carrying value of the bond liability on December 31, year 1, we subtract the interest expense recognized in part b ($17,958) from the carrying value at the beginning of the year ($119,721 - $17,958 = $101,763 (rounded to the nearest dollar).