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98167200000 1i210000 11i2i

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Unformatted text preview: he years that the debt is outstanding. E11–19 a. Interest Expense (E, –SE) (+L) 4,822.70a Cash (–A) 4,000.00b Discount on Bonds 822.70 Incurred and paid interest. a $4,822.70 = Book Value Effective Interest Rate per Period = $96,454 5% b $4,000.00 = Face Value Stated Interest Rate per Period = $100,000 4% b. Bonds Payable (–L) Payable (+L) Bonds Payable (Ga, +SE) 100,000.00 Cash (–A) 91,700.00 Discount on Bonds 2,723.30* Gain on Retirement of 5,576.70 Retired bonds. * $2,723.30 = $3,546 Discount balance as of 12/31/11 – $822.70 Discount amortized from 1/1/12 to 7/1/12 [from part (a)] E11–20 a. The effective interest rate can be calculated in two ways. The first way is by solving for i in the following equation where n=2 since there are two periods until maturity (12/31/11, the balance sheet date and maturity at 12/31/13). $94,650 = [($100,000 (1 + i )­2] + {$5,000 [(1 – [(1 + i)­2 + i ]} The second way is by trial and error. Simply plug an interest rate into the equation above until the right­hand side of the equation equals the left hand side. Since the bond is issued at a discount, we start with the knowledge that the effective rate is greater than the stated rate of 5%. The annual effective interest rate for the bonds is 8%. b. To determine the effective rate an investor would be earning if the bonds were purchased on 12/31/11 at the market value of $98,167, perform the same procedure using the equation. $98,167 = [($200,000 (1 + i )­2] + {$10,000 [(1 – [(1 + i)­2 + i ]} The annual effective interest rate for the bonds is 6%. c. The book value of the bonds on Beasley Brothers’ books at December 31, 2011, is $94,650. The market value of the bonds as of December 31, 2011, is $98,167. The difference represents a loss of $3,517. It is a loss because if Beasley Brothers were to repurchase these bonds on the market in order to retire them, it would have to pay $3,517 more than the book value. Net income Unrealized holding loss on Bonds Payable Adjusted ne...
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