First Exam Notes - BMGT311 Exam 1 Review Ch 14-16 Ch 14...

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BMGT311 – Exam 1 Review – Ch. 14-16 Ch 14 – Long-Term Liabilities – pg. 690-702 Bonds Payable o Discount: Bond sells less than face value o Premium: Bond sells for more than face value Bonds Issued at Par on Interest Date o Example: Par = $800,000, 10 year, dated 1/1/2010, annual rate of 10%, payable semiannually Cash 800,000 Bonds Payable 800,000 First Interest Payment Bond Interest Expense (800,000 x .10 x 1/2) 40,000 Cash 40,000 Accrued interest year-end Expense Bond Interest Expense (800,000 x .10 x 1/2) 40,000 Bond Interest Payable 40,000 Bonds Issued at Discount o Example: $800,000 of bonds 1/1/2010 at 97% of par Cash (800,000 x .97) 776,000 Discount on Bonds Payable 24,000 Bonds Payable 800,000 o Companies amortize the discount and charge it to interest expense over the period of time that the bonds are outstanding. o Straight-Line Method: Amortize a constant amount each interest period First Semiannual Interest Payment Bond Interest Expense (24,000/20 periods = $1,200) + 40,000 41,200
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Discount on Bonds Payable 1,200 Cash 40,000 Year-End Adjusting Entry Bond Interest Expense 41,200 Discount on Bonds Payable 1,200 Bond Interest Payable 40,000 Bonds Issued at Premium o Example: $800,000 of bonds 1/1/2010 at 103% of par Cash (800,000 x 1.03) 824,000 Premium on Bonds Payable 24,000 Bonds Payable 800,000 First Semiannual Interest Payment Bond Interest Expense 40,000 - (24,000/20 periods = $1,200) 38,800 Premium on Bonds Payable 1,200 Cash 40,000 Year-End Adjusting Entry Bond Interest Expense 38,800 Premium on Bonds Payable 1,200 Bond Interest Payable 40,000 o Amortization of a discount increases bond interest expense Amortization of a premium decrease bond interest expense o Whether callable or not, a company must amortize any premium or discount over the bond’s life to maturity because early redemption (call of the bond) is not a certainty. Effective-Interest Method: o Companies…
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Compute bond interest expense first by multiplying the carrying value (book value) of the bonds at the beginning of the period by the effective interest rate. Determine the bond discount or premium amortization next by comparing the bond interest expense with the interest (cash) to be paid o EI Method produces a period interest expense equal to a constant percentage of the carrying value of the bonds o Both the Effective-Interest and Straight-Line methods result in the same total amount of interest expense over the term of the bond Classification of Discount and Premium o Discount on Bonds Premium is a contra-liability o Premium on Bonds Premium is an adjunct account o Companies report bond discounts and bond premiums as a direct deduction from or addition to the face amount of the bond Costs of Issuing a Bond o Unamortized bond issue costs are treated as a deferred charge and amortized over the life of the debt o Example: Sold $20,000,000 of 10-year debenture bonds for $20,795,000 on 1/1/2010, and cost of issuing was $245,000 Jan. 1, 2010 Cash 20,550,00 Unamortized Bond Issue Costs 245,000 Premium on Bonds Payable 795,000 Bonds Payable (To Record Issuance of Bonds) 20,000,000 Dec. 31, 2010 Bond Issue Expense 24,500 Unamortized Bond Issue Costs (to amortize 1 year of bond issue costs, straight-line method) 24,500 Extinguishment of Debt o
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