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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## This homework help was uploaded on 02/19/2009 for the course HA 230 taught by Professor Davidlee during the Fall '06 term at Cornell.

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

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