Chapter 10 Bonds Payable

HOMEWORK COLLECTIONDUE DATE: APRIL 23RD, 2010

PROBLEM 1: PROBLEM 2 P9-2A (collecting)

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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

6

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