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Long-Term Liabilities
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.2
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.
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.3
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
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.4
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
(a) The journal entry to record the sale of the bonds:
Cash 243,799
Discount on Bonds Payable 16,201
Bonds Payable 260,000
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.5
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.
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.6
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
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.7
Equipment
- Accumulated Depr
= Book Value
Related Definitions
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.8
Equipment
- Accumulated Depr
= Book Value
Bonds Payable
+ (unamortized) Premium
- (unamortized) Discount
= Bond Carrying Amount
(or Bond Carrying Value)
Related Definitions
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.9
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
or
to change the BCA (BCV) to FACE by maturity
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.10
Recording Amortization
Amortization of Premium
Premium on Bonds Payable amt
Interest Expense amt
Amortization of Discount
Interest Expense amt
Discount on Bonds Payable amt
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.11
Determining Amortization Amount
Straight-Line Method
(Effective) Interest Method
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.12
Straight-Line Method
Premium or Discount = same amount to each period
periods
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.13
(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
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.14
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) (1) The payment of interest and the discount amortization on July 1, 2008, and (2) amortization of the discount (using the effective interest method).
c) The accrual of interest and the discount amortization on December 31, 2008.
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.15
Determine the amount of one interest payment:
$260,000 x 9% x 6/12 = $11,700
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.16
First Interest Payment
(b) (1)
Bond Interest Expense 11,700
Cash 11,700
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.17
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) (1) The payment of interest and the discount amortization on July 1, 2008, and (2) amortization of the discount (using the effective interest method).
c) The accrual of interest and the discount amortization on December 31, 2008.
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.18
Amortization in Separate Entry
(b) (1)
Bond Interest Expense 11,700
Cash 11,700
(b) (2)
Bond Interest Expense ???
Discount on Bonds Pay ???
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.19
(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
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.21
658 659
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.22
Pmt
A
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
1
244289
Determine Amount of Amortization(refer to example “charts” on pages 702 and 704)658 659
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.23
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
(a) The journal entry to record the sale of the bonds:
Cash 243,799
Discount on Bonds Payable 16,201
Bonds Payable 260,000
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.24
Pmt
A
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
1
244289
Determine Amount of Amortization(refer to example “charts” on pages 702 and 704)658 659
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.25
Pmt
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
Determine Amount of Amortization(refer to example “charts” on pages 702 and 704)658 659
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.26
Pmt
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
Determine Amount of Amortization(refer to example “charts” on pages 702 and 704)658 659
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.27
Amortization in Separate Entry
(b) (1)
Bond Interest Expense 11,700
Cash 11,700
(b) (2)
Bond Interest Expense 490
Discount on Bonds Pay 490
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.28
Textbook’s Illustration
(b)
Bond Interest Expense 12,190
Disc on Bonds Pay 490
Cash 11,700
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.29
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) (1) The payment of interest and the discount amortization on July 1, 2008, and (2) amortization of the discount (using the effective interest method).
c) (1) The accrual of interest and (2) the discount amortization on December 31, 2008.
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.30
Accrual of Interest
(c) (1)
Bond Interest Expense 11,700
Bond Interest Pay 11,700
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.31
Amortization of Discount
(c) (1)
Bond Interest Expense 11,700
Bond Interest Pay 11,700
(c) (2)
Bond Interest Expense ???
Discount on Bonds Pay ???
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.32
Pmt
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
Determine Amount of Amortization(refer to example “charts” on pages 665 and 666)658 659
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.33
Pmt
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
Determine Amount of Amortization(refer to example “charts” on pages 665 and 666)658 659
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.34
Pmt
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 2442892 11700 12214 514 15197 244803
Determine Amount of Amortization(refer to example “charts” on pages 665 and 666)658 659
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.35
Pmt
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 2442892 11700 12214 514 15197 244803
Determine Amount of Amortization(refer to example “charts” on pages 665 and 666)658 659
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.36
Amortization of Discount
(c) (1)
Bond Interest Expense 11,700
Bond Interest Pay 11,700
(c) (2)
Bond Interest Expense 514
Discount on Bonds Pay 514
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.37
Payment on January 1
Bond Interest Payable 11,700
Cash 11,700
© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved.38
Pmt
A
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
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
Determine Amount of Amortization(refer to example “charts” on pages 665 and 666)658 659