4155 12465 pvofinterestpayments 1500 116896

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Unformatted text preview: B will decrease over the life of the bond issue [see part (b)], interest expense associated with Bond B will also decrease from one period to the next. The interest expense associated with Bond C will increase from one period to the next because the book value of Bond C will increase each period [see part (b)]. E11–12 a. 1/1/11 Cash (+A) 30,000 Bonds Payable (+L) 30,000 Issued bonds for cash. b. 6/30/11 Interest Expense (E, –SE) 1,500a Cash (–A) 1,500b Incurred and paid interest. a $1,500 = Book Value Effective Interest Rate per Period = $30,000 5% b $1,500 = Face Value Stated Interest Rate per Period = $30,000 5% 12/31/11 Interest Expense (E, –SE) 1,500 Cash (–A) 1,500 Incurred and paid interest. c. d. Balance Sheet Value = = = Face Value – Associated Discount + Associated Premium $30,000 – $0 + $0 $30,000 Present value (i = 5%, n = 18) PV of face value ($30,000 .4155) $12,465 PV of interest payments ($1,500 11.6896) Total present value e. 17,534 $30,000 Balance Sheet Value as of 12/31/12 = Face Value – Associated Discount + Associated Premium = $30,000 – $0 + $0 = $30,000 Present value as of 12/31/12 (i = 5%, n = 16) PV of face value ($30,000 .4581) $13,743 PV of interest payments ($1,500 10.8378) Total present value 16,257 $30,000 Notice that the balance sheet value of $30,000 is identical to the present value just calculated. Amortizing premiums and discounts using the effective interest rate results in bonds being carried on the balance sheet at an amount equal to the present value of the future cash flows of the bonds, using the effective interest rate on the date the bonds were issued as the discount rate. E11–13 a. Face value $ 500,000 Present value (i = 4%, n = 10) PV of face value ($500,000 0.6756 from Table 4 in Appendix A) 337,800 PV of interest payments ($15,000 8.1109 from Table 5 in Appendix A) 121,664 Total present value 459,464 Discount 40,536 $ $ Cash (+A) Discount on Bonds Payable (–L) 459,464 40,536 Bonds Payable (+L) 500,000 Issued bonds. b. Interest Expense (E...
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