Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

EXERCISE 10-8

Purpose:

(L.O. 5, 8) This exercise will illustrate how account balances involved in accounting for bonds payable are to be reported in the financial statements.

When a company borrows money by issuing long-term debt instruments such as bonds, the entity is obligated to repay the principal plus interest on the outstanding debt. A balance sheet should properly reflect the amounts owed at the statement date. An income statement must report the interest (cost of borrowing) for the period that precedes the related balance sheet date.

The following amounts pertain to a bond issue of the Arnie Howell Corporation (they use a calendar year reporting period):

Face amount of 3-year term bonds issued on January 1, 2014	$100,000.00
Discount on bonds payable at issuance date	$7,460.05
Stated interest rate	7%
Interest payment date is annually on January 1
Maturity date is January 1, 2017
Unamortized discount as of December 31, 2015	$2,486.69
Interest paid during 2015	$7,000.00
Interest expense for the year ending Dec. 31, 2015	$9,486.68
Interest payable at December 31, 2015	$7,000.00

Instructions

Explain what amount(s) would appear on Arnie's multiple-step income statement for the year ended December 31, 2015 and identify the appropriate classification. Also explain what amount(s) would appear on Arnie's balance sheet at December 31, 2015 and identify the appropriate classification.