Unformatted text preview: e per Period = $18,123.06 4%
= Interest Expense – Interest Payment
= Face Value Stated Rate per Period = $20,000 3% 724.92a
Discount on Bonds
124.92b
Cash (–A)
600.00c The amount of discount on bonds payable is essentially the same as the amount in part (c); the difference
of 32¢ is due to rounding. Under the effectiveinterest method, bonds are carried on the balance sheet at
their present value (based upon the effective rate at the initial date of issue) at that particular point in time.
Hence, it makes no difference if one computes the present value of the cash outflows associated with
bonds or applies the effectiveinterest method; both methods will yield essentially identical financial
statements. P11–8
a. To compute the amount of money that Ross Running Shoes must invest on June 30, 2012, the future cash
flows must be discounted at the investment rate of 8%. Since the investment rate is an annual rate, and
interest is paid semiannually, the rate must be adjusted to a sixmonth rate of 4%. Therefore, i = 4% and n
= 6.
Present Value = Present Value of Face Value + Present Value of Interest Payments
= ($10,000 .79031 from Table 4 in Appendix A) + [($10,000 5%) 5.24214 from Table 5 in Appendix A]
= $7,903.10 + $2,621.07
= $10,524.17 b. Interest Expense (E, –SE)
Premium on Notes Payable (–L) 420.97a
79.03b
Cash (–A)
500.00c Incurred and paid interest.
a $420.97 = Book Value Effective Rate per Period = ($10,000 + $524.17) 4%
b $79.03 = Interest Expense – Interest Payment
c $500.00 = Face Value Stated Rate per Period = $10,000 5% c. Interest Expense (E, –SE)
Premium on Notes Payable (–L) 412.64a
87.36b
Cash (–A)
500.00c Incurred and paid interest.
a $412.64 = Interest Payment – Premium Amortization
b $87.36 = Total Premium ÷ Number of 6Month Periods = $524.17 ÷ 6 periods
c $500.00 = Face Value Stated Rate per Period = $10,000 5% P11–8 Concluded d. Under the effectiveinterest method, the company will recognize interest expense during 2012 o...
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 Fall '08
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 Accounting

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