Chapter 11 - Solution Manual

Results obtained are not materially different from

Info icon This preview shows pages 11–13. Sign up to view the full content.

View Full Document Right Arrow Icon
results obtained are not materially different from those which would result from the "interest" method. ii. The discount or premium is not an asset or liability separable from the note that gives rise to it. Therefore, the discount or premium should be reported in the balance sheet as a direct deduction from or an addition to the face amount of the note. It should not be classified as a deferred charge or deferred credit. The description of the note should include the effective interest rate. A valid alternative would be to report the note at its net value, disclosing the face amount of the note and the effective rate of interest on the face of the financial statements or in the notes to the statements. Amortization of discount or premium should be reported as interest expense in the income statement. Case 11-8 a. The market price of the term bonds would be the sum of the present values of all of the expected net future cash flows discounted at an effective annual interest rate (yield) of 10 percent. The net future cash outflows are the maturity amount (face value) and the series of future semiannual interest payments adjusted for accrued interest received. The market price of the serial bonds would be determined by computing the market price for each serial separately in the same way that a term bond would be determined and then totaling these prices for the various serials. a.i. Immediately after the term bond issue was sold, the current asset--cash--would be increased by the proceeds from the sale of the term bond issue. A noncurrent liability--term bonds payable-- would be presented in the balance sheet at the face value of the term bonds, plus the premium. In addition, a current liability--accrued interest payable--would be presented in the balance sheet for accrued interest received (March 1, 2011, to Apri1, 2011). ii. Immediately after the serial bond issue was sold, the current asset --cash--would be increased by the proceeds from the sale of the serial bond issue. A noncurrent liability--serial bonds payable-- would be presented in the balance sheet at the face value of the serial bonds, less the discount.
Image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
222 b. The bond issue costs incurred in preparing and selling the bond issue could be accounted for as a noncurrent asset--deferred charge. The bond issue costs would then be amortized over the period the bonds will be outstanding, that is, the period from date of sale (April 1, 2011) to the maturity date (March 1, 2016). Alternatively, under Statements of Financial Accounting Concepts, the bond issue costs incurred in preparing and selling the bond issue could be either accounted for as an expense in 2011, or as a reduction of the noncurrent liability--term bonds payable--and accounted for the same as debt discount. The latter approach would reduce the carrying value of the debit. The effect would be an increase in interest expense.
Image of page 12
Image of page 13
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern