On January 1, Year 1, O'Keefe Company issued bonds with a face value of $400,000 and a stated interest rate of 10%. The bonds have a life of ten years and were sold at 108. O'Keefe uses the straight-line method to amortize bond discounts and premiums. On December 31, Year 4, O'Keefe called the bonds at 106. Indicate whether each of the following statements is true or false.a)The interest expense for Year 1 was $40,000.b)The balance in the bonds payable account was $400,000 on December 31, Year 1.c)The carrying value of bonds payable was $419,200 on December 31, Year 4.d)When O'Keefe repurchased the bonds, total assets decreased by $419,200.e)When O'Keefe repurchased the bonds, it had to recognize a loss in the amount of $4,800.

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b)True c)True d)False e)Ta)This is false. Interest payment = $400,000 × $10% = $40,000; Premium = Face value of $400,000 × 8% = $32,000; Amortization of premium = Premium of $32,000 ÷ 10 years = $3,200 per year; Year 1 Interest expense = Cash payment of $40,000 − Premium amortization of $3,200 = $36,800b)This is true. The balance in the bonds payable account is $400,000, the face value of the bonds, the entire time that the bonds are outstanding. Only the premium on bonds payable account changes.c)This is true. Issue price = Face value of $400,000 × 108% = $432,000; Carrying value at December 31, Year 4 = $432,000 − [Amortization of $3,200 per year (computed in part a × 4 years)] = $419,200d)This is false. Total assets decreased by the call price of $424,000 (or Face value of $400,000 × Call price of 106%).e)This is true. Loss on bond redemption = Call price of $424,000 (computed in part d)− Carrying value of $419,200 at December 31, Year 4 (computed in part c)= $4,800

On January 1, Year 1, O'Keefe Company Issued Bonds with a Face