The following items pertain to the liabilities of Brent Foods. You may assume that Brent Foods began business on January 1, 2017; therefore, the beginning balance of all accounts was zero. a. On January 1, 2017, Brent Foods issued bonds with a face value of $50,000. The bonds are due in five years and have a face interest rate of 10%. The market rate on January 1 for similar bonds was 12%. The bonds pay interest annually each December 31. Brent has chosen to use the effective interest method of amortization for any premium or discount on the bonds. b. On January 1, 2018, Brent redeems its bonds payable at the specified redemption price of 101. Because this item occurs in 2018, it does not affect the balance sheet prepared for year-end 2017.
Required 1. Determine the effect on the accounting equation on December 31, 2017, for the interest adjustment in (a). 2. Develop the Long-Term Liabilities section of Brent Foods’ balance sheet as of December 31, 2017. You do not need to consider the notes that accompany the balance sheet. 3. Calculate the gain or loss on the bond redemption for (b).
The following components are computed annually when a bond is issued for other than its face value: • Cash interest payment • Interest expense • Amortization of discount/premium • Carrying value of bond
Required State whether each component will increase (I), decrease (D), or remain constant (C) as the bond approaches maturity given the following situations: 1. Issued at a discount 2. Issued at a premium
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