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Chapter 14

# Chapter 14 - Problem 14-1B(50 minutes Part 1 a Cash Flow...

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Problem 14-1B (50 minutes) Part 1 a. Cash Flow Table Table Value* Amount Present Value Par value ................. B.1 0.6139 \$90,000 \$55,251 Interest (annuity) .... B.3 7.7217 5,400** 41,697 Price of bonds ........ \$96,948 Bond Premium ....... \$ 6,948 **\$90,000 x 0.12 x ½ = \$5,400 * Table values are based on a discount rate of 5% (half the annual market rate) and 10 periods (semiannual payments). b. 2008 Jan. 1 Cash ............................................................ 96,948 Premium on Bonds Payable ............... 6,948 Bonds Payable ..................................... 90,000 Sold bonds on stated issue date. Part 2 a. Cash Flow Table Table Value* Amount Present Value Par value ................. B.1 0.5584 \$90,000 \$50,256 Interest (annuity) .... B.3 7.3601 5,400 39,745 Price of bonds ........ \$90,001** * Table values are based on a discount rate of 6% (half the annual market rate) and 10 periods (semiannual payments). (Note: When the contract rate and market rate are the same, the bonds sell at par and there is no discount or premium.) **Difference due to rounding b. 2008 Jan. 1 Cash ............................................................ 90,000 Bonds Payable ..................................... 90,000 Sold bonds on stated issue date.

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Problem 14-1B (Concluded) Part 3 a. Cash Flow Table Table Value* Amount Present Value Par value ................. B.1 0.5083 \$90,000 \$45,747 Interest (annuity) .... B.3 7.0236 5,400 37,927 Price of bonds ........ \$83,674 Bond discount ........ \$ 6,326 * Table values are based on a discount rate of 7% (half the annual market rate) and 10 periods (semiannual payments). b. 2008 Jan. 1 Cash ............................................................ 83,674 Discount on Bonds Payable ..................... 6,326 Bonds Payable ..................................... 90,000 Sold bonds on stated issue date. Problem 14-2B (40 minutes) Part 1 2007 Jan. 1 Cash ............................................................ 3,010,000 Discount on Bonds Payable ..................... 390,000 Bonds Payable ..................................... 3,400,000 Sold bonds on stated issue date. Part 2 [Note: The semiannual amounts for (a), (b), and (c) below are the same throughout the bonds’ life because the company uses straight-line amortization.] (a) Cash Payment = \$3,400,000 x 10% x 6/12 year = \$170,000 (b) Discount = \$3,400,000 - \$3,010,000 = \$390,000 Straight-line discount amortization = \$390,000 / 20 semiannual periods = \$19,500
(c) Bond interest expense = \$170,000 + \$19,500 = \$189,500

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Problem 14-2B (Continued) Part 3 Twenty payments of \$170,000 ......... \$3,400,000 Par value at maturity ........................ 3,400,000 Total repaid ....................................... 6,800,000 Less amount borrowed .................... (3,010,000 ) Total bond interest expense ............ \$3,790,000 or: Twenty payments of \$170,000 ........ \$3,400,000 Plus discount .................................... 390,000 Total bond interest expense ............ \$3,790,000 Part 4 (Semiannual amortization: \$390,000/20 = \$19,500) Semiannual Period-End Unamortized Discount Carrying Value 1/01/2007 ................ \$390,000 \$3,010,000 6/30/2007 ................ 370,500 3,029,500 12/31/2007 ................ 351,000 3,049,000 6/30/2008 ................ 331,500 3,068,500 12/31/2008 ................ 312,000 3,088,000 Part 5 2007 June 30 Bond Interest Expense .............................. 189,500 Discount on Bonds Payable ............... 19,500 Cash ...................................................... 170,000 To record six months’ interest and discount amortization. 2007 Dec. 31 Bond Interest Expense .............................. 189,500 Discount on Bonds Payable ............... 19,500 Cash ...................................................... 170,000 To record six months’ interest and discount amortization.
Problem 14-2B (Continued) Part 6. [Requirements 1 through 5 are repeated assuming a bond premium. ] Requirement 1 2007 Jan. 1 Cash ........................................................... 4,192,932 Premium on Bonds Payable .............. 792,932 Bonds Payable .................................... 3,400,000 Sold bonds on issue date at a premium. Requirement 2 (a) Cash Payment = \$3,400,000 x 10% x 6/12 year = \$170,000 (b) Premium = \$4,192,932 - \$3,400,000 = \$792,932 Straight-line premium amortization= \$792,932/20 semiannual periods = \$39,647* *rounded (c) Bond interest expense = \$170,000 - \$39,647 = \$130,353 Requirement 3 Twenty payments of \$170,000 ......... \$3,400,000 Par value at maturity ........................ 3,400,000 Total repaid ....................................... 6,800,000 Less amount borrowed .................... (4,192,932 ) Total bond interest expense ............ \$2,607,068 or: Twenty payments of \$170,000 ......... \$3,400,000

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Chapter 14 - Problem 14-1B(50 minutes Part 1 a Cash Flow...

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