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Paris Electric sold $3,300,000, 10%, 10-year bonds on January 1, 2017. The bonds were dated...

Question:

Paris Electric sold $3,300,000, 10%, 10-year bonds on January 1, 2017. The bonds were dated January 1 and pay interest annually on January 1. Paris Electric uses the straight line method to amortize bond premium or discount. The bonds were sold at 102.

Show the balance sheet presentation of the bond liability at December 31, 2018 using a partial balance sheet.

Bonds Payable:

Bonds are long-term debt instruments issued in return for capital. Bonds may be issued at face value, a premium, or a discount. A bond issued at a premium is more attractive than other investments on the market due to its higher rate of interest. The opposite is true for bonds issued at a discount. Any premium or discount on the bond is amortized over the bond's useful life.

Answer and Explanation:

First, we'll calculate the bond premium.

Face Value $3,300,000
Bond Premium Percentage (102% - 100%) x 2%
Bond Premium $66,000

Next, we'll calculate the amount to be amortized each year.

Bond Premium $66,000
Number of Periods / 10 years
Bond Amortization per Period $6,600

On December 31, 2018, two years will have passed since the bond's issuance. Thus, $13,200 of the premium will have been amortized. This means that $52,800 of the premium will remain on the books ($66,000 - $13,200). Thus, the balance sheet presentation of the bond liability will be as follows:

Long-Term Liabilities
Bonds Payable $3,300,000
Premium on Bonds Payable $52,800 $3,352,800

Learn more about this topic:

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Long-Term Debt: Definition, Cost & Formula

from Financial Accounting: Help and Review

Chapter 8 / Lesson 7
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