ACCT 1201 Chapter Notes - Chapter 10: Premium Bond, Interest Expense, Effective Interest Rate

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lilacmule890

22 Mar 2016

School

Northeastern University

Department

Accounting

Course

ACCT 1201

Professor

Ganesh Krishnamoorthy

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Document Summary

Capital structure is the mixture of debt and equity a company uses to finance its operations. (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) Interest expense is tax deductible whereas dividends paid on stock are not cash deductible. A bond usually requires the payment of interest over its life with repayment of principal on the maturity date. The bond principal is the amount that is payable at the maturity date and is the amount interests payments are computed with: also called the par value, face amount, and maturity value. A bond always specifies a stated rate of interest and the timing of periodic cash interest payments usually annually or semiannually: the selling price of a bond odes not affect the periodic cash payment of interest. Unsecured (debenture) bond no assets are pledged as a guarantee of repayment at maturity. Secured bond specific assets are pledged as a guarantee of repayment at maturity.

Related Questions

For each of thebonds listed below, record the three requested journalentries.
Dates and descriptions are notrequired.

The Dorchester Companyinvested $100,000 in 5-year bonds. The bonds were purchased at parand bear interest at a rate of 8% per annum, payablesemiannually.

(a)	Prepare the journal entry to record the initialinvestment.
(b)	Prepare the journal entry that Dorchester wouldrecord on each interest date.
(c)	Prepare the journal entry that Dorchester wouldrecord at maturity of the bonds.

a	Investment in bond	100,000
	Cash		100,000

b	Cash	4,000
	Interest income		4,000

c	Cash	100,000
	Investment in bond		100,000


The Dorchester Companyinvested $100,000 of face amount of 5-year bonds. The bonds werepurchased at 103 and bear interest at a stated rate of 8% perannum, payable semiannually.

(a)	Prepare the journal entry to record the initialinvestment.
(b)	Prepare the journal entry that Dorchester wouldrecord on each interest date.
(c)	Prepare the journal entry that Dorchester wouldrecord at maturity of the bonds.

a


b


c







The Dorchester Companyinvested $100,000 of face amount of 4-year bonds. The bonds werepurchased at 98 and bear interest at a stated rate of 8% per annum,payable semiannually.

(a)	Prepare the journal entry to record the initialinvestment.
(b)	Prepare the journal entry that Dorchester wouldrecord on each interest date.
(c)	Prepare the journal entry that Dorchester wouldrecord at maturity of the bonds.

lemonimpala899

Complete the below table to calculate the price of a $1.9 million bond issue under each of the following independent assumptions (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.):

1. Maturity 12 years, interest paid annually, stated rate 10%, effective (market) rate 12%

2. Maturity 9 years, interest paid semiannually, stated rate 10%, effective (market) rate 12%

3. Maturity 6 years, interest paid semiannually, stated rate 12%, effective (market) rate 10%

4. Maturity 20 years, interest paid semiannually, stated rate 12%, effective (market) rate 10%

5. Maturity 10 years, interest paid semiannually, stated rate 12%, effective (market) rate 12%

Maturity 12 years, interest paid annually, stated rate 10%, effective (market) rate 12%. (Round your answers to the nearest whole dollar.)

Table values are based on:
n =
i =
Cash Flow	Amount	Present Value
Interest
Principal
Price of bonds

goldarmadillo620

Garcia Company issues 10%, 15-year bonds with a par value of$170,000 and semiannual interest payments. On the issue date, theannual market rate for these bonds is 8%, which implies a sellingprice of 117 1?4. The effective interest method is used to allocateinterest expense.

1. Using the implied selling price of 117 1?4,what are the issuer's cash proceeds from issuance of thesebonds.

Cashproceeds

2. What total amount of bond interest expensewill be recognized over the life of these bonds?

TotalBond Interest Expense Over Life of Bonds:
Amountrepaid:
	paymentsof
Par valueat maturity
Totalrepayments
Lessamount borrowed (from part 1)
Total bond interest expense

3. What amount of bond interest expense isrecorded on the first interest payment date?
Bond interest expense: ????

ACCT 1201 Chapter Notes - Chapter 10: Premium Bond, Interest Expense, Effective Interest Rate

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