chapter 10 bonds payable
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HOMEWORK COLLECTIONDUE DATE: APRIL 23RD, 2010
PROBLEM 1: PROBLEM 2 P9-2A (collecting)
Professor Vedd
Home work problem 1
Blake Company purchased a capital asset on January 1, 2000 for $57,000. An additional $3,000 was spent on testing. The capital asset is estimated to have a residual value of $5,000. It is estimated the capital asset will be used for 20,000 hours before being sold. The capital asset was used for 4,000 hours in 2000 and 4,800 hours in 2001. In 2002, the capital asset is expected to be used 4,400 hours. The amortization expenses for 2000 and 2001 using three alternative amortization methods are:
Year Method A Method B Method C2000 $11,000 $11,000 $12,0002001 13,200 11,000 9,600
REQUIRED: SEE NEXT SLIDE..
Homework problem 1 (required)
Required:1.Identify the three amortization methods
used. 2.Calculate the amortization expense for 2002
for each of the three methods 3.Record the adjusting entries using Method
B only. 4.Assume the machine was sold on December
31, 2002 for $23,000 cash after the adjusting entry (c) was recorded using Method B, prepare the journal entry to record the disposal of the capital asset. Show all calculations.
Lenard Co. purchases a delivery truck at a cash price of $22,000.
Related expenditures (paid cash) are:
sales taxes $1,320,
painting and lettering $500,
motor vehicle license $80, and
annual accident insurance policy $1,600.
Compute AND RECORD the cost of the delivery truck.
HOMEWORK PROBLEM 2HOMEWORK PROBLEM 2
SOLUTION HOMEWORK PROBLEM 2SOLUTION HOMEWORK PROBLEM 2
Truck
Cash price
Sales taxes
Painting and lettering 500
1,320
$22,000
$23,820Cost of Delivery Truck
SOLUTION HOMEWORK PROBLEM 2
Dr. Truck $23,820
Dr. Licence fees expense 80
Dr. Prepaid Insurance 1,600
Cr. Cash 25,500
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Homework questions:Due Date April 23rd
P9-2A (collecting)
SCHEDULE:
APRIL 30TH : NO CLASSES (FURLOUGH DAY!)
MAY 7TH : CHAPTER 11 FINAL EXAM REVIEW
FINAL EXAM: CHAPTER 9, 10 & 11
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Reporting and Analyzing Liabilities
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OBJECTIVESLIBILITIES
Notes Payable 1. recording the issue of notes payable 2. calculating interest 3. accruing interest at year end (if) 4. presentation: partial statement 5. payment of notes payable at due date.
Bonds Payable1. Recording 2. Calculating and recording interest3. and Amortizing Bonds4. Presentation: Partial statement5. Payment of Bonds payable at due dates
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Current liability is debt :1. Company will pay the debt within one year
Current LiabilitiesCurrent Liabilities
Current liabilities include notes payable, accounts payable, unearned revenues, and accrued liabilities such as taxes, salaries and wages, and interest payable.
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Notes PayableWritten promissory note.
Require the borrower to pay interest.
Those due within one year of the balance sheet date are usually classified as current liabilities.
Current LiabilitiesCurrent Liabilities
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Illustration: First National Bank agrees to lend $100,000 on September 1, 2010, Cole Williams Co. signs a $100,000,
12%, four-month note maturing on January 1. Year end is December 31
Notes payable
100,000
Cash 100,000
Current LiabilitiesCurrent Liabilities
Sept. 1
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Illustration: If Cole Williams Co. prepares financial statements annually, it makes an adjusting entry at December 31 to recognize interest.
Interest payable
4,000
Interest expense 4,000 *
Current LiabilitiesCurrent Liabilities
Dec. 31
* $100,000 x 12% x 4/12 = 4,000
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Illustration: At maturity (January 1), Cole Williams Co. must pay the face value of the note plus interest. It records payment as follows.
Interest payable 4,000
Notes payable 100,000
Current LiabilitiesCurrent Liabilities
Jan. 1
Cash
104,000
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Issuing ProceduresBond certificate
Issued to the investor.
Provides information such as the
name of the company issuing bonds,
Face value - principal due at the maturity.
Maturity date - date final payment is due.
Contractual interest rate – rate to determine cash interest paid, generally semiannually.
Sold in small denominations (usually $1,000 or multiples of $1,000).
Bond: Long-Term LiabilitiesBond: Long-Term Liabilities
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Bond: Long-Term LiabilitiesBond: Long-Term Liabilities
MaturityDateMaturityDate
Illustration 10-3
Contractual InterestRate
Contractual InterestRate
Face or Par ValueFace or Par Value
Issuer of BondsIssuer of Bonds
SO 4 Identify the types of bonds.Professor Vedd
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BOND MARKET: FINANCIAL MARKET
Corporate, Government & Agency,Municipal, Mortgage etc.
(NYSE) is the largest centralized bond market, representing mostly corporate bonds.
Also trading: between broker-dealers and large institutions in a decentralized, over-the-counter (OTC) market.
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Illustration: Devor Corporation issues $100,000, five-year, 10%, bonds dated January 1, 2010, at 100 (100% of face value). The entry to record the sale is:
Jan. 1 Cash 100,000
Issuing Bonds at Face ValueIssuing Bonds at Face Value
Bonds payable 100,000
Prepare the entry Devor would make to accrue interest on December 31.
Dec. 31 Bond interest expense 10,000
Bond interest payable 10,000
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Prepare the entry Devor would make to pay the interest on Jan. 1, 2011.
Jan. 1 Bond interest payable 10,000
Cash 10,000
Issuing Bonds at Face ValueIssuing Bonds at Face Value
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$100,000 9% , 5 years bonds1. Record the entry: Issued on January 1, 2008 and issued at
face value (Par Value) (market price quoted as 100 (100%)
Dr. Cash 100,000Bonds payable 100,000
2. Record the entry at year end dec. 31Dr. Bond Interest expense 9,000
Cr. Bonds interest payable 9,0003. Jan 1’Dr. bond interest payable 9,000 cr. Cash 9,0004 Record the entry at Maturity date at the end of year 5January 1 2013Dr. bond interest payable 9,000 cash 9,000Dr. Bonds payable 100,000
Cr. Cash 100,000Professor Vedd
Interest Rates and Bond Prices
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Illustration: Assume that on January 1, 2010, Candlestick Inc. sells $100,000, five-year, 10% bonds at 98 (98% of face value) with interest payable on January 1. The entry to record the issuance is:
Issuing Bonds at a DiscountIssuing Bonds at a Discount
Jan. 1 Cash 98,000
Discount on bonds payable2,000
Bonds payable 100,000
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Statement Presentation
Issuing Bonds at a DiscountIssuing Bonds at a Discount
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To follow the matching principle, companies allocate bond discount and bond premium to expense in each period in which the bonds are outstanding.
Amortizing Bond Discount and Premium
Straight-Line AmortizationStraight-Line Amortization
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1. Interest is payable on January 1 of each year. 100,000 x 10%= 10,000
Amortizing Bond Discount
Straight-Line AmortizationStraight-Line Amortization
Discount on bonds payable
400
Bond interest expense 10,400 Dec. 31
Bond interest payable
10,000
2. Discount on Bonds payable is Amortized over the term of the bonds: Straight line MethodCandlestick Bonds are 5 yearsAmortization: 2,000/5 = 400
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Illustration 10A-2
Amortizing Bond Discount
Straight-Line AmortizationStraight-Line Amortization Appendix 10A
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Illustration: Assume that the Candlestick Inc. bonds previously described sell at 102 rather than at 98. The entry to record the sale is:
Jan. 1 Cash 102,000
Bonds payable 100,000
Premium on bonds payable 2,000
Issuing Bonds at a PremiumIssuing Bonds at a Premium
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Statement Presentation
Issuing Bonds at a PremiumIssuing Bonds at a Premium
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Illustration: Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2010, for $102,000 (premium of $2,000).
Interest: 100,000 x 10% = 10,000
Amortization of Premium: 2,000/5 years = 400
Amortizing Bond Premium
Straight-Line AmortizationStraight-Line Amortization
Premium on bonds payable 400
Bond interest expense 9,600Dec. 31
Bond interest payable
10,000
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Illustration 10A-2
Amortizing Bond Premium
Straight-Line AmortizationStraight-Line Amortization
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Redeeming Bonds at Maturity
Candlestick records the redemption of its bonds at maturity as follows:
Accounting for Bond RetirementsAccounting for Bond Retirements
Bonds payable 100,000
Cash 100,000
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Balance Sheet Presentation
Financial Statement Analysis and PresentationFinancial Statement Analysis and Presentation
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In class problem 1
on January 1, 2010, ABC Inc. sells $500,000, 6-year, 10% bonds at 99 with interest payable on January 1.
The entry to record the issuance of bonds JAN 1 DR. CASH 495,000 DR. DISCOUNT ON BONDS PAYABLE 5000 CR. BONDS PAYABLE 500,000 The entry to record at Dec. 31, 2010 500,000 X 10%= 50,000 DISCOUNT 5000/6=833 DR. BOND INT EXPENSE 50,833 CR. DISCOUNT ON BONDS PAY 833 CR. BONDS INTEREST PAYABLE 50,000
Prepare partial balance sheet at Dec. 31, 2010
NAME CO BALANCE SHEET (PARTIAL)DEC. 31, 2010LONG TERM LIABILITIESBONDS PAYABLE
500,000LESS; DISCOUNT ON B. PAYABLE (5,000 – 833)
4,167
495,833
The entry to record the payment of bonds at maturity.
JAN. 1 2016 DR. INTEREST PAYABLE 50,000 CR. CASH 50,000 DR. BONDS PAYABLE 500,000 CR. CASH 500,000
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HOMEWORK problem 1
on January 1, 2010, ABC Inc. sells $500,000, 6-year, 10% bonds at 101 with interest payable on January 1.
The entry to record the issuance of bonds The entry to record at Dec. 31, 2010 Prepare partial balance Sheet At Dec. 31,
2010 The entry to record the payment of bonds
at maturity.
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Collecting: HOMEWORKPROBLEM 10-8A (10 POINTS)PROBLEM 10-2B (10 POINTS)
PRACTICE: FOR FINAL EXAM BRIEF EXERCISE 10-6 BRIEF EXERCISE 10-8 *BRIEF EXERCISE 10-12 *BRIEF EXERCISE 10-13 EXERCISE 10-3 EXERCISE 10-8
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NO QUIZZES ANY MOREEXTRA: HOMEWORK QUESTIONS