Acct. 221 1st Edition Lecture 21Outline of Last Lecture 1. Bondsa. Effective Rateb. How to find issue price c. Interest paymentsOutline of Current Lecture 2. Bondsa. How to calculate issue price b. Selling bondsc. Amortization schedule Current Lecture Bonds Calculating issue price Need:- Face value- Market interest rate- Stated rate (cash interest)- Years Selling Bonds On May 1st, 2012, Clock Corp. sells $1,000,000 in bonds having a stated rate of 6% annually (bond rate). The bonds mature in 10 years, and interest is paid semiannually. The market rate is 8% annually. - 1,000,000 is the face value: What bondholders get at maturity- 6% is the stated rate: Interest yearly = Face Value * Stated Rate 1,000,000 * .06 = 60,000- Step 1:These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute. Discount or Premium? Discount because our stated rate is less than market rate - Step 2: Present Value & Face Value Face Value * (.46319) = $463,000 .46319 = PV table of $1 at 8% for 10 years- Step 3: Find cash payment of interest First: Face Value * Stated Value 1,000,000 * .06 = 60,000 Second: Use PV table of Aunnity of $1 8% for 10 years = 6.7101 Third: 60,000*6.7101 = $403, 000 Fourth: Add Step 2 and 3 together- 403,000 + 463,000 = $866,000- Step 4: Record in t-accounts Debit Cash $870,000 Credit Bond Payable (Liability) $1,000,000 Debit Bond Discount (contra liability) $130,000 Amortization Schedule Cash Payment: (interest)- Stated Rate * Face Value Affects Balance Sheet Interest Expense:- Carrying Value * Market Value Affects income statement Amortization of Discount:- Difference between interest expense and cash payment Bond Carrying Value:- Issue Day = Amount received for bond- Following Year = carrying value from year before + bond discount
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