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Lecture 23

ACTG 1P91 Lecture Notes - Lecture 23: Cash Flow, Interest Expense, Effective Interest RatePremium


Department
Accounting
Course Code
ACTG 1P91
Professor
Sohyung Kim
Lecture
23

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Chapter 10 Continued
Issued at discount:
A company issues a bond with face value of $1,000 with coupon rate of 5% on 12/31/2017.
Maturity date is 12/31/2032 and the interest will be paid once a year at 12/31. Market interest
rate is 5.15%.
- $985
Note that bond price is determined by two factors, cash flow and discount rate. Cash flow is
determined by the contract b/w the company and the bond holder and discount rate is
determined by market interest rate.
12/31/2017
dr) Cash 985
cr) B/P 985
On Balance Sheet (12/31/2017)
Bond payable 985
12/31/2018
dr) Interest expense 51
cr) Cash 50
cr) B/P 1
On BS: bond payable = 986
Every time interest is paid, carrying value of B/P will increase, eventually all the way to 1,000.
12/31/2032
dr) B/P 1,000
cr) Cash 1,000
Example of a bond:
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