Presentvaluei5n5 pvoffacevalue 5000 7835 from table

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Unformatted text preview: t the liability's life. Alternatively, the straight­line method does not maintain this equality. Further, under the effective interest method, interest expense is always the same percentage of the outstanding debt throughout the life of the liability. This constant relationship arises because interest expense is computed as the book value times the effective interest rate, and since the effective interest rate is assumed to be constant, interest expense remains a constant percentage of the liability. The straight­line method does not result in this constant relationship between interest expense and the outstanding liability, as evidenced by the amounts reported under interest expense in part (c). P11–10 a. Book Value of Debt Cash Paid to Retire Debt Loss b. = Face Value of $500,000 + Premium Balance of $12,600 = $512,600 = Face Value 104% = $500,000 104% = $520,000 = Excess of Cash Paid Over Book Value = $512,600 – $520,000 = $7,400 Cash Paid to Retire Debt = Face Value 108% = $500,000 108% = $540,000 P11–10 Concluded Loss c. = Excess of Cash Paid Over Book Value = $540,000 – $512,600 = $27,400 Ginny and Bill Eateries is required to make an interest payment on June 30, 2012 under the terms of the debt agreement. The entry to record this payment would be: Interest Expense (E, –SE) Premium on Bonds Payable (–L) 15,378a 4,622b Cash (–A) 20,000c Incurred and paid interest. a $15,378 = Book Value Effective Rate per Period = $512,600 3% b $4,622 = Interest Expense – Interest Payment c $20,000 = Face Value Stated Rate per Period = $500,000 4% Book Value of Debt = Face Value + Premium Balance = $500,000 + ($12,600 – $4,622) = $507,978 Cash Paid to Retire Debt Loss = Face Value 110% = $500,000 110% = $550,000 = Excess of Cash Paid Over Book Value = $550,000 – $507,978 = $42,022 P11–11 a. Face value $ 5,000.00 Present value (i = 7%, n = 10) PV of face value ($5,000 .5083 from Table $ 2,541.50 4 in Appendix A) PV of interest payments ($300 7.0236 from Table 5 2,107.08 in...
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