Jacobs Company issued bonds with a $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 to amortize bond discounts and premiums.Based on this information alone,how does the recognition of interest expense during Year 1 affect the company's accounting equation?
A)Decrease equity by $25,800,decrease liabilities by $1,200,and decrease assets by $27,000
B)Decrease both assets and stockholders' equity by $2,700
C)Decrease both assets and stockholders' 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

Issue price = Face value of $300,000 × 102% = $306,000
Premium = Issue price of $306,000 - Face value of $300,000 = $6,000
Annual amortization of premium = Premium of $6,000 ÷ 5 years = $1,200
$300,000 × 9% = $27,000 interest payment;$27,000 - $1,200 = $25,800 interest expense;
The event will decrease assets (cash)by $27,000,decrease liabilities (premium on bonds payable)by $1,200,and decrease equity (interest expense)by $25,800.

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