Assignment_9_-_Lecture_Notes__1

# 1 issue bonds dr cash 96139 dr discount on bonds

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1. Issue bonds Dr Cash \$96,139 Dr Discount on Bonds Payable 3,861 Cr Bonds Payable \$100,000 2. Semiannual payment Dr Interest Expense \$4,886 Cr Discount on Bonds Payable* 386 Cr Cash \$4,500 *3,861/10 periods = 386 The results: Interest expense is recorded at the effective rate, not coupon rate. The bond will be amortized to its face value. Carrying Amount of Bond (discount): Bonds payable – Discount on Bond Payable = Carrying amount of bond 1. At issue \$100,000 - \$3,861 = \$96,139 2. After first interest payment \$100,000 - \$3,475 = \$96,525 3. After the 2 nd interest payment \$100,000 - \$3,089 = \$96,911

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4. The Discount on Bonds Payable will decrease by the amortized amount with each interest payment. 5. At maturity: Carry amount = Bonds Payable (Discount has been amortized to zero.) The carrying amount of the bond will increase with each interest payment. After the final interest payment the Discount on Bonds Payable will be zero, the carrying amount \$100,000. Premiums: Opposite of Discount Issue: Credit Premium on Bonds Payable Interest payment: Debit Premium on Bonds Payable Carrying amount of the bond is Bond Payable + Premium on Bonds Payable
Notes Installment note – requires equal payments. Unsecure loan. Mortgage note – an installment note with collateral. Most home and car loans. Example: Purchase a \$18,000 car with a 4 year, 7% note payable monthly. **** * **** Beginning *** ** Decrease Ending Time Carrying Note Interest in Notes Carrying Months Amount Payment Expense Payable Amount 1 18,000.00 431.0 3 105.00 326.03 17,673.97 2 17,673.97 431.0 3 103.10 327.93 17,346.03 3 17,346.03 431.0 3 101.19 329.85 17,016.19 4 17,016.19 431.0 3 99.26 331.77 16,684.41 5 16,684.41 431.0 3 97.33 333.71 16,350.71 6 16,350.71 431.0 3 95.38 335.65 16,015.05 7 16,015.05 431.0 3 93.42 337.61 15,677.44 8 15,677.44 431.0 3 91.45 339.58 15,337.86 9 15,337.86 431.0 3 89.47 341.56 14,996.30 10 14,996.30 431.0 3 87.48 343.55 14,652.75 11 14,652.75 431.0 3 85.47 345.56 14,307.19 12 14,307.19 431.0 3 83.46 347.57 13,959.62 * As interest decreases, more of the payment goes to paying down the principle . ** The decrease in the carrying amount decrease the amount interest charged . *** Car loan paymen t amount, always

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the same. **** The ending carrying amount for one period is the same as the beginni ng carrying amount for the next period. Journal Entries: 1. Issue: Dr Car18,000 Cr Notes Payable 18,000 (If note is for cash, cash would be debited.) 2. 1st payment of interest: Dr Interest Expense 105 Dr Notes Payable 326.03 Cr Cash 431.03 3.
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