AFM101 Lecture Notes - Lecture 19: Effective Interest Rate, Book Value, Operating Lease

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skyoyster237

13 Nov 2018

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM101

Professor

Haihao Lu

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AFM101 Lecture Notes - Lecture 18: Contingent Liability, Promissory Note, Current Liability

AFM101 Lecture Notes - Lecture 19: Effective Interest Rate, Book Value, Operating Lease

AFM101 Lecture Notes - Lecture 20: Legal Personality, Share Capital, Retained Earnings

Document Summary

Over the life of the bond issue, the discount and premium accounts are amortized. In the case of discounts: the discount is allocated to interest expense through amortization each period over the term of the bond. The discount on the bonds increases the bonds" interest expense each period over the term of the bonds. In the case of premiums: the premium is allocated to the interest expense through amortization each period over the term of the bond. The premium on the bonds decreases the bonds" interest expense each period over the term of the bonds. Effective interest rate method for bonds paying interest semi-annually. Interest payment: interest payment is set by the bond contract and therefore remains the same over the life of the bonds. Where, bond carrying amount for bond discount = carrying amount from previous period + current period"s amortization amount. Bond carrying amount for bond premium = carrying amount from previous period + current period"s amortization amount.

Related Questions

On July 1, Hanover Company issued $2,000,000 of 10-year, 6%bonds at an effective interest rate of 5%. This netted the company$2,154,435. Interest on the bonds is payable annually on July 1.The president of Hanover has asked you to develop an amortizationschedule worksheet (file name AMORT) that will use the effectiveinterest method to calculate annual interest expense, premium (ordiscount) amortization, unamortized premium (or discount), and bondcarrying amount. Your worksheet should include a Data Section.

Check figure: Amortization of bond premium, tenth year,$19,048.

To test your model, calculate the annual interest expense,discount amortization, unamortized discount, and bond carryingamount of $700,000 of 10-year, 7.5% bonds at an effective interestrate of 8%. The issuance of these bonds netted the company$676,515. Interest on the bonds is payable annually. Print theworksheet when done. Check figure: Amortization of bond discount,tenth year, $3,241.

Please show all the formulas.

Problem 10-3B

Straight-line: Amortization of bond premium P1 P3

Refer to the bond details in Problem 10-2B, exceptassume that the bonds are issued at a price of $4,192,932.

Required

Prepare the January 1, 2013, journal entry to record the bonds'issuance.

For each semiannual period, compute (a) the cashpayment, (b) the straight-line premium amortization, and(c) the bond interest expense.

Determine the total bond interest expense to be recognized overthe bonds' life.

Prepare the first two years of an amortization table likeExhibit 10.11 using the straight-line method.

Prepare the journal entries to record the first two interestpayments.

Check

(3) $2,607,068

(4) 6/30/2014 carrying value, 4,073,991

1. Journal Entry:

Date	Account Title	Debit	Credit
Jan1 2013	Cash	3,010,000
	Discount on issue ofBonds	390,000
	10% Bonds Payable		3,400,000

2. Cash Payment for Each semiannual period:

3,400,000 x 5% = $170,000

Straight Line Discount amortization = 390,000 / 20 = $19,500

Bond Interest Expenses = 170,000 + 19,500 = $189,500

3. Total Bond Interest expenses = 189,500 x 20 = $3,790,000

4. Amortization Table:

Date	Interest Payment	Interest Expenses	Amortization of BondDiscount	Debit Balance in BondsDiscount	Book Value of the Bonds
1 Jan 2013				390,000	3,010,000
30 June 2013	170,000	189,500	19,500	370,500	3,029,500
Dec31 2013	170,000	189,500	19,500	351,000	3,049,000

5. Journal entries for interest:

Date	Account Title	Debit	Credit
June 30, 2013	Interest Expenses	189,500
	Discount on Issue ofBonds		19,500
	Cash		170,000

Dec31, 2013	Interest Expenses	189,500
	Discount on Issue ofBonds		19,500
	Cash		170,000

fuchsiajackal691

Bonds Payable Journal Entries; Effective Interest Amortization
On December 31, 2009, Blair Company issued $800,000 of 20-year, 11% bonds payable for $754,784, yielding an effective interest rate of 12%. Interest is payable semiannually on June 30 and December 31. Prepare journal entries to reflect (a) the issuance of the bonds, (b) the semiannual interest payment and discount amortization (effective interest method) on June 30, 2010, and (c) the semiannual interest payment and discount amortization on December 31, 2010. Round amounts to the nearest dollar.

General Journal
Date	Description	Debit	Credit
a.)
Dec.31	Cash	$Answer	$Answer
	Answer: Cash, Discount on Bonds Payable, Bonds Payable, Bond Interest Expense	Answer	Answer
	Answer: Cash, Discount on Bonds Payable, Bonds Payable, Bond Interest Expense	Answer	Answer
	To record issuance of bonds.
b.
Jun.30	Answer: Cash, Discount on Bonds Payable, Bonds Payable, Bond Interest Expense.	Answer	Answer
	Answer: Cash, Discount on Bonds Payable, Bonds Payable, Bond Interest Expense.	Answer	Answer
	Cash	Answer	Answer
	To record semiannual interest payment and discount amortization.
c.)
Dec.31	Answer: Cash, Discount on Bonds Payable, Bonds Payable, Bond Interest Expense	Answer	Answer
	Answer: Cash, Discount on Bonds Payable, Bonds Payable, Bond Interest Expense	Answer	Answer
	Cash	Answer	Answer
	To record semiannual interest payment.

blushlouse689

AFM101 Lecture Notes - Lecture 19: Effective Interest Rate, Book Value, Operating Lease

AFM101 Lecture Notes - Lecture 18: Contingent Liability, Promissory Note, Current Liability

AFM101 Lecture Notes - Lecture 19: Effective Interest Rate, Book Value, Operating Lease

AFM101 Lecture Notes - Lecture 20: Legal Personality, Share Capital, Retained Earnings

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