Baird Manufacturing Company issued $150,000 of 7%, 5-year bonds for $144,000, on January 1, Year 1. Interest is payable on January 1 of each year. Baird uses the straight-line method of amortization. The first interest payment is to be made on January 1, Year 2.Required:a) Show the effects of the following events on the accounting equation.Event 1. The issuance of the bonds.Event 2. Accrual of interest at December 31, Year 1.Event 3. Amortization of discount at December 31, Year 1.Event 4. Payment of interest on January 1, Year 2.Event No.Assets=Liabilities+Equity1.???????????2.?????3.?????4.?????b) What is the carrying value of the bond on December 31, Year 1?c) What is the amount of interest paid in (1) Year 1? (2) Year 2?d) What is
the amount of interest expense shown on the income statement in Year 1?
What will be an ideal response?
a)
| Event No. | Assets | = | Liabilities | + | Equity |
| 1. | 144,000 | ? | 150,000 | ? | ? |
| ? | ? | ? | (6,000) | ? | ? |
| 2. | ? | ? | 10,500 | ? | (10,500) |
| 3. | ? | ? | 1,200 | ? | (1,200) |
| 4. | (10,500) | ? | (10,500) | ? | ? |
c) Interest paid in Year 1: zero; Interest paid in Year 2: $10,500
d) $10,500 + $1,200 = $11,700 interest expense in Year 1
a) Issuing the bonds increases assets (cash) by $144,000 (the issue price of the bonds) and increases liabilities by $144,000 (increase bonds payable by $150,000 and increase the contra-asset discount on bonds payable by $6,000). On December 31, Year 1, the accrual of interest increases liabilities (interest payable) and decreases equity (interest expense) by 7% of $150,000, or $10,500. On December 31, Year 1, the amortization of the discount increases liabilities (decrease to discount on bonds payable) and decreases equity (interest expense) by $6,000/5 years, or $1,200. On January 1, Year 2, the payment of interest decreases assets (cash) and decreases liabilities (interest payable) by $10,500.
b) The carrying value on December 31, Year 2 is equal to the face value of the bonds ($150,000), less the remaining balance in discount on bonds payable ($4,800) following amortization.
c) There is no interest paid in Year 1, as the first interest payment is due January 1, Year 2. The interest payment in Year 2 is equal to the face value times the stated rate, $150,000 × 7% = $10,500
d) Interest expense in Year 1 is equal to the $10,500 interest payment plus the $1,200 amortization of the discount
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