copyright © 2001 by m. ray gregg. all rights reserved. 1 focus

Copyright © 2001 by M. Ray Gregg. All rights reserved.1

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Little Co.

Big Corp.


? ? ?


A = L + C


A = L + C

This Week’sLesson

Long-Term Liabilities


Long-Term LiabilitiesObjectivesObjectives

Determine and record the selling price of the bond

Determine and record amortization of premium and discount

using straight-line method interest method



Obligations incurred when issuing bonds:

“I promise I will . . .”

I. Pay “face” at maturity

II. Pay periodic interest






II. Pay periodic interest at the

contract rate






II. Pay periodic interest at the

contract rate on the face amount


Obligations Incurred on Bonds

I.

x



I.

x

II. x x x x x x x x


Rates of Interest

stated, contract, or coupon rate (specified)

effective or market rate (reflected in sales price of the bond)


I promise to pay 8%.


I see I can earn 10% today.





contract




market

contract




market

contract

market > contract




market

contract

unattractivemarket > contract




market

contract

unattractive = discountmarket > contract


Bonds for Sale!Getcha 12% bonds

right here!



right here!

Bonds Selling at 10% Today



market contract


right here!



market < contract


right here!



market < contract

attractive


right here!



market < contract

attractive = premium


right here!


Issuing Bonds at Face



MarketRate

SellingPriceContract

Rate

Face



MarketRate


Rate

Face

Cash face Bonds Payable face


Issuing Bonds at More Than Face



Market

Rate

Selling

Price

Contract

Rate

Face



Market

Rate

Selling

Price

Contract

Rate

Face

Cash rec’d Prem on Bonds Pay diff Bonds Payable face


Issuing Bonds at Less Than Face

MarketRate

SellingPrice

Contract

Rate

Face


Issuing Bonds at Less Than Face

MarketRate

SellingPrice

Contract

Rate

Face

Cash rec’dDiscount on Bonds Pay diff Bonds Payable face


Contract


Contract

Discount


Contract

Discount

Unattractive


Interest on Your Savings Account

DeterminingSelling Price of Bonds



I.

x

II. x x x x x x x x


Determining Selling Price

I.

x

II. x x x x x x x x


I.

x

II. x x x x x x x x



Present Value of Face

+ Present Value of Interest

= Proceeds from Sale of Bonds



I.

x

II. x x x x x x x x


ExerciseBound Corp issued $260,000, 9%, 10-year bonds on January 1, 2002, 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, 2002.

c) The accrual of interest and the discount amortization on December 31, 2002.


Determine the amount of one interest payment:

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


PV of $260,000 @ 10% semiannually:

$260,000



$260,000 x present value “tables” in the text



$260,000 x present value “tables” in text

Always look up MARKET in the tables



MarketRate


Rate

Face



$260,000 x .37689



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



I.

x

II. x x x x x x x x



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

PV of Interest



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



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

PV of Interest

$11,700



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

PV of Interest

$11,700 x 12.46221



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

PV of Interest

$11,700 x 12.46221 = 145,807.85



$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




b) The payment of interest and the discount amortization on July 1, 2002.



Homework

For Problem16-7A, 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 or pages from an unassigned problem in the Working Papers.



$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


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

or

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 pp. 701 - 704 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, 2002, and (2) amortization of the discount (using the effective interest method).




$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 pp. 701 - 704 at end of chapter)

Interest PAID

(face x contract)

Interest INCURRED

(BCA x market)

Amount ofAmortization


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)



$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


Pmt

A


$260,000)


C Discount


D Unamortized

Discount (D - C)

E B. C. A.

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

16201 243799

1

244289



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



Pmt

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

(b)


Disc on Bonds Pay 490

Cash 11,700





c) (1) The accrual of interest and (2) the discount amortization on December 31, 2000.


Accrual of Interest

(c) (1)


Bond Interest Pay 11,700



(c) (1)



(c) (2)

Bond Interest Expense ???

Discount on Bonds Pay ???


Pmt

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



Pmt

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


Pmt

A


$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


copyright © 2001 by m. ray gregg. all rights reserved. 1 focus

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