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Accounting Essay

707 words - 3 pages

Exercise 14-2

1. Discount = Par value - Issue price = \$90,000 - \$85,431 = \$4,569

2. Total bond interest expense over the life of the bonds

|Amount repaid | |
| Six payments of \$3,600 |\$ 21,600 |
| Par value at maturity | 90,000 |
| Total repaid |111,600 |
|Less amount borrowed | (85,431) |
|Total bond interest expense ...view middle of the document...

Semiannual cash interest payment = \$600,000 x 6% x ½ year = \$18,000

2. Number of payments = 10 years x 2 per year = 20 semiannual payments

3. The 6% contract rate is less than the 8% market rate; therefore, the bonds are issued at a discount.

4. Estimation of the market price at the issue date

|Cash Flow |Table |Table Value* |Amount |Present Value |
|Par (maturity) value |B.1 | 0.4564 |\$600,000 |\$273,840 |
|Interest (annuity) |B.3 |13.5903 | 18,000 | 244,625 |
|Price of bonds | | | |\$518,465 |

* Table values are based on a discount rate of 4% (half the annual market rate) and 20 periods (semiannual payments).

|5. |Cash |518,465 | |
| |Discount on Bonds Payable |81,535 | |
| | Bonds Payable | |600,000 |
| | Sold bonds at a discount on the stated issue date. | |

Problem 14-5AB

Part 1

|Ten payments of \$16,250 |\$ 162,500 |
|Par value at maturity | 500,000 |
|Total repaid |662,500 |
|Less amount borrowed | (510,666) |
|Total bond interest expense |\$ 151,834 |

or:
|Ten payments of \$16,250 |\$ 162,500 |
|Total bond interest expense |\$ 151,834 |

Part 2

| |(A) |(B) |(C) |(D) |(E) |
|Semiannual |Cash Interest Paid |Bond Interest Expense |Premium Amortization |Unamortized |Carrying |
|Interest Period-End|[3.25% x \$500,000] |[3% x Prior (E)] |[(A) - (B)] |Premium |Value |
| | | | |[Prior (D) -...

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