Fall 2013_Acc 3100_Ch 14

Interest each period is recorded as the effective

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Unformatted text preview: each period is recorded as the effective market rate of interest multiplied by the outstanding balance of the debt (during the interest period). Interest is recorded as expense to the issuer and revenue to the investor. For the first six-month interest period the amount is calculated as follows: $666,633 Outstanding Balance × (14% ÷ 2) Effective Rate = $46,664 Effective Interest The bond indenture calls for semiannual interest payments of only $42,000 – the stated rate (6%) times the face value of $700,000. The difference ($4,664) increases the liability and is reflected as a reduction in the discount (a contra-liability account). 14-7 Recording Interest Expense The effective interest is calculated each period as the market rate times the amount of the debt outstanding during the interest period. At the First Interest Date (June 30) Masterwear (Issuer) Interest expense 46,664 Discount on bonds payable 4,664 Cash 42,000 United (Investor) Cash Discount on bond investment Investment revenue $700,000 × (12% ÷ 2) = $42,000 $700,000 × (12% ÷ 2) = $42,000 $46,664 - $42,000 = $4,664 $46,664 - $42,000 = $4,664 42,000 4,664 46,664 $666,633 × (14% ÷ 2) = $46,664 $666,633 × (14% ÷ 2) = $46,664 14-8 Bond Amortization Schedule Here is a bond amortization schedule showing the cash interest, effective interest, discount amortization, and the carrying value of the bon...
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This note was uploaded on 11/19/2013 for the course ACCOUNTING 3100 taught by Professor He during the Fall '10 term at CUNY Baruch.

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