Acc011_09_LongtermLiabilities

Acc011_09_LongtermLiabilities - Long-term Liabilities Bonds...

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Long-term Liabilities
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Bonds Payable • Determination of Issue Price – present value of future cashflows discounted at effective rate of interest • Discount – Bond is said to sell at a discount when the issue price is less than face value. This occurs when the stated (nominal) rate is less than the required (effective) rate of return. • Premium – Bond is said to sell at a premium
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Example • Dunk's Donuts sells perpetual bonds with a face value of $10,000 and a stated interest rate of 12%. The applicable interest rate for bonds of this length and risk, is 15%. Record the sale and the first (annual) interest payment.
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Amortization • Discount or premium is amortized and charged to interest expense over the life of the bonds.
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Calculation of Interest Expense • Interest expense is increased by amortization of the discount and decreased by amortization of premium. • If discount Interest expense = cash paid + amortization • If premium Interest expense = cash paid
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Note • At the maturity date of the bond the discount or premium must be fully amortized, i.e., the balance in the discount or premium account must be zero.
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Methods of Amortization Effective Interest Method Straight Line Amortization
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Effective Interest Method • Interest Expense equals the carrying value of the bonds (face value less unamortized discount or plus unamortized premium) at the beginning of the period multiplied by the effective rate. • The amount amortized is equal to the difference between the interest expense recognized and the interest paid.
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Bond Discount and Premium  Bond Discount and Premium  Amortization Computation Amortization Computation
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Straight Line Amortization Interest Expense equals the amount of interest paid plus
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This note was uploaded on 05/19/2008 for the course ACCT 3511 taught by Professor Balsam during the Spring '07 term at Temple.

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Acc011_09_LongtermLiabilities - Long-term Liabilities Bonds...

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