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Asnoted in partd for notes issuedata premium the

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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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