# Under the effectiveinterest method bonds are carried

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Unformatted text preview: iving Range and Health Club would actually earn the effective interest rate on its money. The excess of the face value over the proceeds gave rise to the Discount on Notes Payable, and from Rix's viewpoint, this account effectively represents prepaid interest. Over the life of the note, this discount will be amortized to Interest Expense. Consequently, the difference between the balance in Interest Expense and the cash paid out for interest payments represents the amortization of the Discount on Notes Payable. c. Interest Expense \$95,000 Rate d. = Face Value of Debt Stated Interest Rate = \$800,000 10% = \$80,000 = Book Value at Beginning of the Period Effective Interest Rate = (\$800,000 – \$70,000) Effective interest rate = 13% (rounded) Interest Expense (E, –SE) Payable (+L) Cash (–A) 95,000 Discount on Notes 15,000 80,000 Incurred and paid interest. P11–7 a. Face value \$ 20,000.00 Present value (i = 4%, n = 12) PV of cash payment at maturity (\$20,000 \$ Table 4 in Appendix A) 0.6246 from 12,492.00 PV of cash interest payments (\$600 9.3851 from Table 5 5,631.06 in Appendix A) Total present value 18,123.06 Discount on bonds \$ 1,876.94 b. Face value \$ 20,000.00 Present value (i = 4%, n = 11) PV of cash payment at maturity (\$20,000 \$ Table 4 in Appendix A) 0.6496 from 12,992.00 PV of cash interest payments (\$600 8.7605 from Table 5 5,256.30 in Appendix A) Total present value 18,248.30 Discount on bonds \$ 1,751.70 The present value of the cash flows on these bonds as of December 31, 2012, using the effective interest rate on the date the bonds were originally issued, represents the book value of the bonds as of December 31, 2012. c. The difference of \$125.24 in present values from June 30, 2012 and December 31, 2012 represents the change in book value of these bonds for this six­month period. The change in book value would be captured by the amortization of the Discount on Bonds Payable account. P11–7 Concluded d. Interest Expense (E, –SE) Payable (+L) Incurred and paid interest. a \$724.92 b \$124.92 c \$600.00 = Book Value Effective Rat...
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## This homework help was uploaded on 03/03/2014 for the course ACCT 5053 taught by Professor Staff during the Fall '08 term at Oklahoma State.

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