Acct 221 1st Edition Lecture 21 Outline of Last Lecture 1 Bonds a Effective Rate b How to find issue price c Interest payments Outline of Current Lecture 2 Bonds a How to calculate issue price b Selling bonds c 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 amortization
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