Interest is payable annually on January 1 This is the same bond as E14 6 except

Interest is payable annually on january 1 this is the

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Interest is payable annually on January 1. (This is the same bond as E14-6, except use effective interest method.) 1/1/2014 Cash 1,855,816 At Issue Discount on Bonds 144,184 Bonds Payable 2,000,000 12/31/2014 AJE Interest Expense (NCV x mkt rate x time) 222,698 Discount on Bonds 22,698 Interest Payable (FV x std rate x time) 200,000 1/1/2015 Interest Payable 200,000 (All Interest Pmt Dates) Cash 200,000 12/31/2015 AJE Interest Expense (NCV x mkt rate x time) 225,422 Discount on Bonds 25,422 Interest Payable (FV x std rate x time) 200,000 1/1/2016 Interest Payable 200,000 (All Interest Pmt Dates) Cash 200,000 (I used an on-line calculator to compute the rate, since I do not have a calculator that does time value of money calculations. The one I used is at: Using the financial calculator version 4.2, set interest payment at the end of the period . Enter n=5; PV=1,855,816; Pmt=(200,000); FV=(2,000,000). (Note: The pmt and FV values have to be entered as negative numbers.) Leave the interest rate field blank and press the “IR” key to calculate the rate above.) The effective market rate was ~ 12%. If you did not calculate this on a calculator that has time value of money function, then the you can calculate the effective-interest or yield rate is 12% through a trial and error process using Table 6-2 for the discounted value of the principal ($1,134,860) and Table 6-4 for the discounted value of the interest ($720,956); for a total present value of $1,855,816. (A financial calculator may be used to determine the rate of 12%.) Present Value of the: Face Value: = Face Value x PV of $1 factor (i= 12%, n=5) $2,000,000 x 0.56743 = $1,134,860 Interest Payments = Interest Payment x PV of ordinary annuity factor (i=12%, n=5) = (FV x stated rate x time) x PV of ordinary annuity factor (i=12%, n=5) = ($2,000,000 x 10%/12 mo x 12 mo.) x 3.60478 $200,000 x 3.60478 = 720,956 Cash Proceeds from the Sale of the Bond $1,855,816 Interest Expense over Life of Bond = Interest Payments + Discount = total # of payments made x interest payment + discount at issue = # of payments made x (FV x std rate x time) + discount at issue = {5 annual payments x ($2,000,000 x 10%/12 mo. x 12 mo.)} + $144,184 = (5 annual payments x $200,000) + $144,184 = $1,000,000 + $144,184 = $1,144,184
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ACCO 4020: Chapter 14 homework solutions (15 th edition) EXERCISE 14-7 (15 th edition) – continued: (part f) Amortization Table - Effective-Interest Method (12%) Year Cash Paid (=FV x std rate x time) (=$2,000,000 x 10%/12 mo. x 12 mo.) Interest Expense (=NCV x mkt rate x time) (=NCV x 12%/12 mo. x 12 mo.) Discount Amortized Carrying Value of Bonds (NCV) Jan. 1, 2014 $1,855,816.00 Dec. 31, 2014 $200,000 $222,697.92 $22,697.92 1,878,513.92 Dec. 31, 2015 200,000 225,421.67 25,421.67 1,903,935.59 Dec. 31, 2016 200,000 228,472.27 28,472.27 1,932,407.86 Dec. 31, 2017 200,000 231,888.94 31,888.94 1,964,296.80 Dec. 31, 2018 200,000 235,703.20 35,703.20 2,000,000.00 totals $1,000,000 $1,144,184 $144,184 (part g) Entry for early retirement of bond on 1/1/2016: 1/1/2016 Bond Payable 2,000,000 At early Loss on Retirement 136,064 retirement Discount on Bond Payable 96,064 Cash (102% x $2,000,000 face) 2,040,000
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ACCO 4020: Chapter 14 homework solutions (15 th edition) EXERCISE 14-9 (15 th edition) Facts: On June 30, 2014, Mischa Auer Co. issued $4,000,000 face value, 13%, 20-year bonds at $4,300,920, a yield of 12%. The company uses the effective interest method to amortize the bond premium or discount. The bonds pay interest semiannually on June 30 and December 31.
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