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ACCT-UB 1 Lecture Notes - Lecture 10: Root Mean Square, Credit Risk, Net Present Value

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pinkmoose758
30 Oct 2016
School
New York University
Department
Accounting
Course
ACCT-UB 1
Professor
Meng Xiaojing

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Document Summary

Cash accounting | cash ow recognised when cash is exchanged. Accruel accounting | cash ow recognised when expense is accrued and revenue is earned. Annuity (npv) | xed cash ow each period up to a limited amount of time. Bond certi cate: promise to pay back investors: periodic coupon/interest payment (normally every 6 months, face value payment at the end. Face value | what you receive during maturity, large single payment in the end (not the same as the bond"s market value) Coupon rate | rate used to compute the periodic interest payments that must be paid by the borrower to whoever owns the bond. Coupon payment | face value x coupon rate. Market interest rate | interest rate determined by market. E ective rate | the market interest rate when the bond is issued (rate used to discount. Present value of the principal (a single payment) + present value of the coupon payments (an annuity)

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Related Questions

Southwest Corporation issued bonds with the following details:
Face value: $670,000
Interest: 10 percent per year payable each December 31
Terms: Bonds dated January 1, 2015, due five years from that date

The annual accounting period ends December 31. The bonds were issued at 103 on January 1, 2015, when the market interest rate was 9 percent. Assume the company uses straight-line amortization and adjusts for any rounding errors when recording interest expense in the final year.

Compute the cash received from the bond issuance in dollar. TIP: The issue price typically is quoted at a percentage of face value.

Prepare the journal entry to record the issuance of the bonds and the payment of interest on December 31, 2015 and 2016. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

1. Record the issuance of bonds with a face value of $670,000 at 103.

2. Record the interest payment on December 31, 2015.

3. Record the interest payment on December 31, 2016.

How much interest expense would be reported on the income statements for 2015 and 2016?

Compute the bond value which should be reported on the balance sheets at December 31, 2015 and 2016.

SOUTHWEST CORPORATION
Balance Sheet (partial)
2015 2016
Carrying Value
sangriamuskrat770

During 2014 and 2015, Cook Co. completed the following transactions relating to its bond issue. The company’s fiscal year ends on December 31.
2014
Mar. 1

Issued $360,000 of eight-year, 5 percent bonds for $348,000. The semiannual cash payment for interest is due on March 1 and September 1, beginning September 2014.
Sept. 1

Recognized interest expense including the amortization of the discount and made the semiannual cash payment for interest.
Dec. 31 Recognized accrued interest expense including the amortization of the discount.
2015
Mar. 1

Recognized interest expense including the amortization of the discount and made the semiannual cash payment for interest.
Sept. 1

Recognized interest expense including the amortization of the discount and made the semiannual cash payment for interest.
Dec. 31 Recognized accrued interest expense including the amortization of the discount.
Required
a-1.

When the bonds were issued, was the market rate of interest more or less than the stated rate of interest?
More
Less


a-2.

If the bonds had sold at face value, what amount of cash would Cook Co. have received?


b.

Prepare the liabilities section of the balance sheet at December 31, 2014 and 2015.


c.

Determine the amount of interest expense Cook would report on the income statements for 2014 and 2015.


d.

Determine the amount of interest Cook would pay to the bondholders in 2014 and 2015.

indigollama91