Jacobs Company issued bonds with $300,000 face value on January 1,2016.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 31,2016 would act to:
A)Decrease equity by $25,800,decrease liabilities by $1,200,and decrease assets by $27,000.
B)Decrease both assets and equity by $2,700.
C)Decrease both assets and equity by $25,800.
D)Increase liabilities by $1,200,decrease assets by $25,800,and decrease equity by $27,000.

Question

Quizplus · Accepted Answer

The bond was issued at 102, which means the company received $306,000 (face value x 102%). The premium of $6,000 needs to be amortized over the life of the bond using the straight-line method.
The annual interest expense is calculated as $300,000 x 9% = $27,000.
The annual amortization of the premium is $6,000 ÷ 5 years = $1,200.
Therefore, the interest expense recognized on December 31, 2016, would be $27,000 - $1,200 = $25,800.
This would decrease equity by $25,800, decrease liabilities by $1,200 (due to the amortization of the premium), and decrease assets by $27,000 (due to the recognition of interest expense).

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