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Patal Company issued $150,000 face value of bonds on January 1, 2013. The bonds had a 7 percent stated rate of interest and a five year term. Interest is paid in cash annually, beginning December 31, 2013. The bonds were issued at 98.
Required:
a. Use a financial statements model like the one shown below to demonstrate how (1) the January 1, 2013, bond issue and (2) the December 31, 2013, recognition of interest expense, including the amortization of the discount and the cash payment, affects the company's financial statements. Use + for increase, Use - for decrease, and NA for not affected.
b. Determine the carrying value (face value less discount or plus premium) of the bond liability as of December 31, 2013. c. Determine the amount of interest expense reported on the 2013 income statement. d. Determine the carrying value (face value less discount or plus premium) of the bond liability as of December 31, 2014. e. Determine the amount of interest expense reported on the 2014 income statement.
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