Harrah_s_Bond_example_Solutions

Harrah_s_Bond_example_Solutions - Harrah's: $100,000 Par...

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Harrah's: $100,000 Par Value Five-year Bonds, Stated Interest rate of 10% a. Single payment (principal repayment): $100,000 X 0.5674 = $56,740 b. Annuity (interest payments): $10,000 X 3.6048 = $36,048 Issue (Sale) Price of Harrah's Bonds = $92,788 Amount of discount ($100,000 - $92, 788) = $7,212 Journal Entry to Record: Dr Cr Cash $92,788 Discount on Bonds Payable $7,212 Bonds Payable $100,000 Straight line amortization: Straight line amortization = $7,212 / 5 years = $1,442/year See: Amortization Schedule from page 526 What about amortization using the Effective-Interest Rate method? Same Discount (base on 12% market rate and 10% stated rate = $7,212 Two Steps: 1. Compute the Interest Expense (income statement expense): Unpaid Balance X Effective Rate (market rate at issue) X n/12 n = Number of months in each interest period (often 6; in this case, 12) 2. Compute the Amortization amount: Interest Expense - Cash interest paid See: Amortization Schedule to the Left (also on page528): Date
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Harrah_s_Bond_example_Solutions - Harrah's: $100,000 Par...

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