Long-Term Liabilities. © Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 2 Exercise Bound Corp issued $260,000, 9%, 10-year bonds on January.

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Long-Term Liabilities

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 2 Exercise Bound Corp issued $260,000, 9%, 10-year bonds on January 1, 2008, for $243,799. This price resulted in an effective interest rate of 10% on the bonds. Interest is payable semiannually on July 1 and January 1. Bound uses the effective-interest method to amortize bond premium or discount. Interest is not accrued on June 30. Prepare the journal entries to record (to the nearest dollar): a) The issuance of the bonds. b) The payment of interest and the discount amortization on July 1, c) The accrual of interest and the discount amortization on December 31, 2008.

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 3 PV of 10% semiannually: $260,000 x.37689=$ 97, PV of Interest $11,700 x = 145, Proceeds from the Sale of Bonds=$243,799.25

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 4 PV of 10% semiannually: $260,000 x.37689=$ 97, PV of Interest $11,700 x = 145, Proceeds from the Sale of Bonds=$243, (a) The journal entry to record the sale of the bonds: Cash243,799 Discount on Bonds Payable 16,201 Bonds Payable 260,000

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 5 Homework For Problem15-6A, present calculations (similar to those demonstrated here) to support determination of the selling price of the bonds. Allow the amount given in the textbook to serve as a “check figure.” Use lined notebook paper, pages from an unassigned problem in the Working Papers, or computer software.

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 6 Amortization of PREMIUM or DISCOUNT on Bonds Objectives: 1.to match the correct expense with the correct year 2.to eliminate the related Premium or Discount account

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 7 Equipment - Accumulated Depr = Book Value Related Definitions

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 8 Equipment - Accumulated Depr = Book Value Bonds Payable + (unamortized) Premium - (unamortized) Discount = Bond Carrying Amount (or Bond Carrying Value) Related Definitions

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 9 Amortization of PREMIUM or DISCOUNT on Bonds Objectives: 1.to match the correct expense with the correct year 2.to eliminate the related Premium or Discount account or to change the BCA (BCV) to FACE by maturity

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 10 Recording Amortization Amortization of Premium Premium on Bonds Payableamt Interest Expenseamt Amortization of Discount Interest Expenseamt Discount on Bonds Payableamt

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 11 Determining Amortization Amount Straight-Line Method (Effective) Interest Method

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 12 Straight-Line Method Premium or Discount = same amount to each period periods

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 13 (Effective) Interest Method (see Appendix 15B, pp at end of chapter) Interest PAID (face x contract) Interest INCURRED (BCA x market) Amount of Amortization

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 14 Exercise Bound Corp issued $260,000, 9%, 10-year bonds on January 1, 2008, for $243,799. This price resulted in an effective interest rate of 10% on the bonds. Interest is payable semiannually on July 1 and January 1. Bound uses the effective-interest method to amortize bond premium or discount. Interest is not accrued on June 30. Prepare the journal entries to record (to the nearest dollar): a) The issuance of the bonds. b) (1) The payment of interest and the discount amortization on July 1, 2008, and (2) amortization of the discount (using the effective interest method). c) The accrual of interest and the discount amortization on December 31, 2008.

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 15 Determine the amount of one interest payment: $260,000 x 9% x 6/12 = $11,700

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 16 First Interest Payment (b) (1) Bond Interest Expense 11,700 Cash11,700

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 17 Exercise Bound Corp issued $260,000, 9%, 10-year bonds on January 1, 2008, for $243,799. This price resulted in an effective interest rate of 10% on the bonds. Interest is payable semiannually on July 1 and January 1. Bound uses the effective-interest method to amortize bond premium or discount. Interest is not accrued on June 30. Prepare the journal entries to record (to the nearest dollar): a) The issuance of the bonds. b) (1) The payment of interest and the discount amortization on July 1, 2008, and (2) amortization of the discount (using the effective interest method). c) The accrual of interest and the discount amortization on December 31, 2008.

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 18 Amortization in Separate Entry (b) (1) Bond Interest Expense 11,700 Cash11,700 (b) (2) Bond Interest Expense??? Discount on Bonds Pay ???

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 19 (Effective) Interest Method (see Appendix 15B, pp at end of chapter) Interest PAID (face x contract) Interest INCURRED (BCA x market) Amount of Amortization

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 22 Determine Amount of Amortization (refer to example “charts” on pages 702 and 704)

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 23 PV of 10% semiannually: $260,000 x.37689=$ 97, PV of Interest $11,700 x = 145, Proceeds from the Sale of Bonds=$243, (a) The journal entry to record the sale of the bonds: Cash243,799 Discount on Bonds Payable 16,201 Bonds Payable 260,000

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 24 Determine Amount of Amortization (refer to example “charts” on pages 702 and 704)

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 25 Determine Amount of Amortization (refer to example “charts” on pages 702 and 704)

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 26 Determine Amount of Amortization (refer to example “charts” on pages 702 and 704)

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 27 Amortization in Separate Entry (b) (1) Bond Interest Expense 11,700 Cash11,700 (b) (2) Bond Interest Expense490 Discount on Bonds Pay 490

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 28 Textbook’s Illustration (b) Bond Interest Expense 12,190 Disc on Bonds Pay 490 Cash11,700

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 29 Exercise Bound Corp issued $260,000, 9%, 10-year bonds on January 1, 2008, for $243,799. This price resulted in an effective interest rate of 10% on the bonds. Interest is payable semiannually on July 1 and January 1. Bound uses the effective-interest method to amortize bond premium or discount. Interest is not accrued on June 30. Prepare the journal entries to record (to the nearest dollar): a) The issuance of the bonds. b) (1) The payment of interest and the discount amortization on July 1, 2008, and (2) amortization of the discount (using the effective interest method). c) (1) The accrual of interest and (2) the discount amortization on December 31, 2008.

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 30 Accrual of Interest (c) (1) Bond Interest Expense 11,700 Bond Interest Pay11,700

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 31 Amortization of Discount (c) (1) Bond Interest Expense 11,700 Bond Interest Pay11,700 (c) (2) Bond Interest Expense??? Discount on Bonds Pay ???

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 32 Determine Amount of Amortization (refer to example “charts” on pages 665 and 666)

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 33 Determine Amount of Amortization (refer to example “charts” on pages 665 and 666)

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 34 Determine Amount of Amortization (refer to example “charts” on pages 665 and 666)

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 35 Determine Amount of Amortization (refer to example “charts” on pages 665 and 666)

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 36 Amortization of Discount (c) (1) Bond Interest Expense 11,700 Bond Interest Pay11,700 (c) (2) Bond Interest Expense514 Discount on Bonds Pay 514

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 37 Payment on January 1 Bond Interest Payable 11,700 Cash11,700

© Copyright 2001, 2009 by M. Ray Gregg. All rights reserved. 38 Determine Amount of Amortization (refer to example “charts” on pages 665 and 666)