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Little Co.

Big Corp.

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

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

unattractivemarket > contract

market

contract

unattractive = discountmarket > contract

Bonds for Sale!Getcha 12% bonds

right here!

Bonds Selling at 10% Today

market contract

right here!

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

MarketRate

Cash face Bonds Payable face

Issuing Bonds at More Than Face

Market

Selling

Contract

Market

Selling

Contract

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

Issuing Bonds at Less Than Face

MarketRate

SellingPrice

Contract

Issuing Bonds at Less Than Face

MarketRate

SellingPrice

Contract

Cash rec’dDiscount on Bonds Pay diff Bonds Payable face

Contract

Discount

Contract

Discount

Unattractive

Interest on Your Savings Account

DeterminingSelling Price of Bonds

II. x x x x x x x x

Determining Selling Price

II. x x x x x x x x

Present Value of Face

+ Present Value of Interest

= Proceeds from Sale of Bonds

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

$260,000 x .37689

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

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

$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

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

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)

$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, 2000.

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

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

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