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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 Fall '08
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 Accounting

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