Long-Term Liabilities. © Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 2 Exercise...

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Long-Term Liabilities

ExerciseBound Corp issued $260,000, 9%, 10-year bonds on January 1, 2008, for $243,799. This price resulted in an effective interest rate of 10% on the bonds. Interest is payable semiannually on July 1 and January 1. Bound uses the effective-interest method to amortize bond premium or discount. Interest is not accrued on June 30.

Prepare the journal entries to record (to the nearest dollar):a) The issuance of the bonds.

b) The payment of interest and the discount amortization on July 1, 2008.

c) The accrual of interest and the discount amortization on December 31, 2008.

PV of $260,000 @ 10% semiannually:

$260,000 x .37689 = $ 97,991.40

PV of Interest

$11,700 x 12.46221 = 145,807.85

Proceeds from the Sale of Bonds = $243,799.25

$260,000 x .37689 = $ 97,991.40

PV of Interest

$11,700 x 12.46221 = 145,807.85

(a) The journal entry to record the sale of the bonds:

Cash 243,799

Discount on Bonds Payable 16,201

Bonds Payable 260,000

Homework

For Problem15-6A, present calculations (similar to those demonstrated here) to support determination of the selling price of the bonds. Allow the amount given in the textbook to serve as a “check figure.” Use lined notebook paper, pages from an unassigned problem in the Working Papers, or computer software.

Amortization of PREMIUM or DISCOUNT on Bonds

Objectives:

1. to match the correct expense with the correct year

2. to eliminate the related Premium or Discount account

Equipment

- Accumulated Depr

= Book Value

Related Definitions

Equipment

- Accumulated Depr

= Book Value

Bonds Payable

+ (unamortized) Premium

- (unamortized) Discount

= Bond Carrying Amount

(or Bond Carrying Value)

Related Definitions

Amortization of PREMIUM or DISCOUNT on Bonds

Objectives:

1. to match the correct expense with the correct year

2. to eliminate the related Premium or Discount account

to change the BCA (BCV) to FACE by maturity

Recording Amortization

Amortization of Premium

Premium on Bonds Payable amt

Interest Expense amt

Amortization of Discount

Interest Expense amt

Discount on Bonds Payable amt

Determining Amortization Amount

Straight-Line Method

(Effective) Interest Method

Straight-Line Method

Premium or Discount = same amount to each period

periods

(Effective) Interest Method(see Appendix 15B, pp. 657 - 661 at end of chapter)

Interest PAID

(face x contract)

Interest INCURRED

(BCA x market)

Amount ofAmortization

b) (1) The payment of interest and the discount amortization on July 1, 2008, and (2) amortization of the discount (using the effective interest method).

Determine the amount of one interest payment:

$260,000 x 9% x 6/12 = $11,700

First Interest Payment

(b) (1)

Bond Interest Expense 11,700

Cash 11,700

Amortization in Separate Entry

(b) (1)

Cash 11,700

(b) (2)

Bond Interest Expense ???

Discount on Bonds Pay ???

(Effective) Interest Method(see Appendix 15B, pp. 657 - 661 at end of chapter)

Interest PAID

(face x contract)

Interest INCURRED

(BCA x market)

Amount ofAmortization

658 659

Interest Paid (4.5% x

$260,000)

B Interest Expense (5% x E)

C Discount

Amortization (B - A)

D Unamortized

Discount (D - C)

E B. C. A.

($260,000 - D) (E + C)

16201 243799

244289

Determine Amount of Amortization(refer to example “charts” on pages 702 and 704)658 659

$260,000 x .37689 = $ 97,991.40

PV of Interest

$11,700 x 12.46221 = 145,807.85

(a) The journal entry to record the sale of the bonds:

Cash 243,799

Discount on Bonds Payable 16,201

Bonds Payable 260,000

$260,000)

C Discount

D Unamortized

Discount (D - C)

E B. C. A.

($260,000 - D) (E + C)

16201 243799

244289

A Interest Paid

(4.5% x$260,000)

B InterestExpense(5% x E)

C Discount

Amortization(B - A)

D Unamortized

Discount(D - C)

E B. C. A.

($260,000 - D)(E + C)

16201 2437991 11700 12190 490 15711 244289

A Interest Paid

(4.5% x$260,000)

C Discount

Amortization(B - A)

D Unamortized

Discount(D - C)

E B. C. A.

($260,000 - D)(E + C)

16201 2437991 11700 12190 490 15711 244289

Amortization in Separate Entry

(b) (1)

Cash 11,700

(b) (2)

Bond Interest Expense 490

Discount on Bonds Pay 490

Textbook’s Illustration

Disc on Bonds Pay 490

Cash 11,700

c) (1) The accrual of interest and (2) the discount amortization on December 31, 2008.

Accrual of Interest

(c) (1)

Bond Interest Pay 11,700

(c) (1)

(c) (2)

Bond Interest Expense ???

Discount on Bonds Pay ???

A Interest Paid

(4.5% x$260,000)

C Discount

Amortization(B - A)

D Unamortized

Discount(D - C)

E B. C. A.

($260,000 - D)(E + C)

16201 2437991 11700 12190 490 15711 244289

A Interest Paid

(4.5% x$260,000)

C Discount

Amortization(B - A)

D Unamortized

Discount(D - C)

E B. C. A.

($260,000 - D)(E + C)

16201 2437991 11700 12190 490 15711 244289

A Interest Paid

(4.5% x$260,000)

C Discount

Amortization(B - A)

D Unamortized

Discount(D - C)

E B. C. A.

($260,000 - D)(E + C)

16201 2437991 11700 12190 490 15711 2442892 11700 12214 514 15197 244803

A Interest Paid

(4.5% x$260,000)

C Discount

Amortization(B - A)

D Unamortized

Discount(D - C)

E B. C. A.

($260,000 - D)(E + C)

16201 2437991 11700 12190 490 15711 2442892 11700 12214 514 15197 244803

(c) (1)

(c) (2)

Bond Interest Expense 514

Discount on Bonds Pay 514

Payment on January 1

Bond Interest Payable 11,700

Cash 11,700

$260,000)

C Discount

D Unamortized

Discount (D - C)

E B. C. A.

($260,000 - D) (E + C)

16201 243799

1 11700 12190 490 15711 244289

2 11700 12214 514 15197 244803

3 11700 12240 540 14657 245343

4 11700 12267 567 14090 245910

5 11700 12296 596 13494 246506

Long-Term Liabilities. © Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 2 Exercise...

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