LL_posted - Long-term Liabilities (Ch 14) Page 2 B) EXAMPLE...

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Long-term Liabilities (Ch 14) Page 2 B) EXAMPLE 1 : Plain vanilla bonds issued when the market rate ≠ the coupon rate. Naylor Corporation, a company with a 12/31 year- end, issued ten-year, 10% bonds (payable annually) to Bank on January 1 with face value of $100,000. REQUIRED: a. If the market interest rate (i.e., effective interest
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Long-term Liabilities (Ch 14) Page 3 C) EXAMPLE 2 : Plain vanilla bonds with a couple of twists . On April 1, 2010, Walker Inc., a company with a 12/31 year-end, issued $700,000 of 12% (annual rate) bonds payable, dated April 1. Interest is payable semi-annually on September 30 and March 31. The bonds mature in three years. The market yield for bonds of similar risk and maturity is 10%. The entire bond issue was purchased by United Group, Inc. a. Calculate the issue price of the bonds. 6 n, 5 I/Y, 42,000 pmt, 700,000 FV  PV = $735,530
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Long-term Liabilities (Ch 14) Page 3 interest rate table that shows the first year of the bond (April 1, 2010 to March 31, 2011). Date (1) Cash Paid (2) Interest Expense = prior (4) * 5% (3) Amortized premium = (1) – (2) (4) CV of bond = prior (4) – (3) 4/110 $735,530 9/30/10 $42,000 $36,777 $5,223 730,307 3/31/11 42,000 36,515 5,485 724,822
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Long-term Liabilities (Ch 14) Page 5 F). EXAMPLE 3: On January 1, 2010, Oak Hall, makers of graduation caps and gowns issued $200,000 bonds payable with a stated interest rate of 8%. Interest is paid each December 31. The bonds mature in 10 years and are callable after the 4th year at 101% of face value. The bonds originally sold on January 1, 2010 to yield 7%. On January 1, 2016, the bonds were called because interest rates were falling . . The company uses effective-interest amortization, and the accounting period
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Long-term Liabilities (Ch 14) Page 5 a. Prepare the journal entry for the bond issuance on January 1, 2010. Dr: cash $214,047 Cr: premium $14,047 Cr: B/P $200,000 b. Give the entries for interest expense for 2010 through 2015.
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This note was uploaded on 02/22/2012 for the course ACCT 401 taught by Professor Winchel during the Spring '10 term at South Carolina.

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LL_posted - Long-term Liabilities (Ch 14) Page 2 B) EXAMPLE...

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