Jacobs Company issued bonds with $300,000 face value on January 1, Year 1. The bonds were issued at 102 and carried a 5-year term to maturity. They had a 9% stated rate of interest that was payable in cash on December 31st of each year. Jacobs uses the straight-line method of amortization. Based on this information alone, the recognition of interest expense on December 31, Year 1 would act to:

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The interest expense for the year is calculated as the face value of the bonds ($300,000) multiplied by the stated interest rate (9%), which equals $27,000. Since the bonds were issued at 102, there is a premium of $6,000 ($300,000 * 2%). The straight-line method of amortization divides this premium by the term of the bonds (5 years), resulting in an annual amortization of $1,200. Therefore, the interest expense recognized is $27,000, but the cash paid for interest is $27,000, and the amortization of the premium reduces the carrying amount of the liability by $1,200. This results in a decrease in stockholders' equity by $25,800 (the net expense recognized), a decrease in liabilities by $1,200 (amortization of the premium), and a decrease in assets (cash) by $27,000 (the interest payment).

Jacobs Company Issued Bonds with $300,000 Face Value on January