Solution_Chpt10 - Solution_Chapter10 Acct 2311 F09 Li 8....

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Solution_Chapter10 Acct 2311 F09 Li Page 1 of 7 8. When a bond is issued (sold) at its face amount, it is issued at par. In contrast, when a bond is sold at an amount lower than the par amount, it is issued at a discount, and conversely, when it is sold at a price above par, it is issued at a premium. A bond will sell at a discount when the market, or effective, rate of interest is higher than the stated rate of interest on the bond. In contrast, when the market or effective rate of interest is lower than the stated rate, the bond will sell at a premium. Discounts or premiums on bonds payable are adjustments to the effective interest rate on the bonds. Therefore, the discount or premium is amortized over the life of the bonds as an increase or decrease in the amount of interest expense for each period. 9. The stated rate of interest is the rate specified on a bond, whereas the effective rate of interest is the market rate at which the bonds are selling currently. 10. When a bond is sold at par, the stated interest rate and the effective or market interest rate are identical. When a bond is sold at a discount, the stated rate of interest is lower than the effective rate of interest on the bond. In contrast, when a bond is sold at a premium, the stated rate of interest is higher than the effective rate of interest. 11. A bond issued at par will have a book or carrying value, or net liability, equal to the par or principal of the bond. This amount should be reported as the carrying value on each balance sheet date. When a bond is sold at a premium or discount, the premium or discount must be amortized over the outstanding life of the bond. When there is bond discount or premium, the par amount of the bond less the unamortized discount, or plus the unamortized premium, must be reported on the balance sheet as the net liability as follows: Bonds payable . .................................................. $100,000 $100,000 Less: Unamortized discount. ............................. 12,000 Plus: Unamortized premium. ............................. 12,000 Book value (net liability). .................................. $ 88,000 $112,000 ANSWERS TO MULTIPLE CHOICE 1. c) 2. c) 3. b) 4. d) 5. c) 6. b) 7. c) 8. c) 9. a) 10. c) M10–4. January 1, 2009: Cash (+A). ................................................................................................ 940,000 Discount on Bonds Payable (+XL, -L). .................................................... 60,000 Bonds Payable (+L) . ............................................................................. 1,000,000 June 30, 2009: Bond Interest Expense (+E, -SE) ($940,000 × 11% × 1/2) . .................... 51,700 Discount on Bonds Payable (-XL, +L). ................................................ 1,700 Cash (-A) ($1,000,000 × 10% × 1/2) . .................................................. 50,000
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This note was uploaded on 02/10/2012 for the course ACCT 2301 taught by Professor Li during the Fall '09 term at University of Central Florida.

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Solution_Chpt10 - Solution_Chapter10 Acct 2311 F09 Li 8....

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