San Jose Company issued five-year 8% bonds with a face value of $100,000, for $107,023.58 on January 1, Year 1 when the market (effective) rate of interest was 7%. The bonds pay annual interest each December 31. San Jose uses the effective interest method to amortize bond discounts and premiums. (Round all intermediate calculations and final answers to two decimal places.)Required:a) Determine the annual amount of cash that will be paid to bondholders for interest?b) Calculate the amounts of: (1) Interest expense in Year 1 (2) Premium amortization in Year 1 (3) Carrying amount of the liability on December 31, Year 1c) Calculate the amounts of (1) Interest expense in Year 2 (2) Premium amortization in Year 2 (3) Carrying amount of the liability at December 31, Year 2?d) Determine the
total amount of interest that will be recorded in interest expense over the life of the bond.
What will be an ideal response?
| a) | $8,000 |
| b) | (1) $7,491.65 |
(2) $508.35
Year 1 Amortization of premium = Interest payment of $8,000 ? Interest expense of $7,491.65 = $508.35
(3) $106,515.23
Carrying value at end of Year 1 = Carrying value at beginning of Year 1 of $107,023.58 ? Amortization of premium of $508.35 = $106,515.23
| c) | (1) $7,456.07 |
(2) $543.93
Year 2 Amortization of premium = Interest payment of $8,000 ? Interest expense of $7,456.07 = $543.93
(3) $105,971.30
Carrying value at end of Year 2 = Carrying value at end of Year 1 of $106,515.23
? Amortization of premium of $543.93 = $105,971.30
| d) | $72,976.42 |
Business
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