Monday November 21st Chapter 10 ANSWERS TO QUESTIONS M10 3 Principal 900 000 0 4350 391 500 Interest 27 000 13 2944 358 949 Issue Price 750 449 E10 2 The AT T bonds have a coupon interest rate of 6 5 If bonds with a 10 000 face value were purchased the issue price would be 8 950 and they would provide a cash yield of 7 3 A decline in value after issuance would have no impact on AT T s financial statements E10 12 1 Issue price 948 Stated rate 6 effective or yield rate 8 both were given 2 Discount 1 000 948 52 3 1 000 x 6 60 4 2011 76 2012 77 2013 79 5 Balance sheet 2011 964 2012 981 2013 1 000 immediately before retirement 6 Effective interest amortization was used 7 a 1 000 x 6 60 b 964 x 8 77 rounded c 77 60 17 d 964 17 981 8 Effective interest amortization measures the amount of interest expense and net liability for each period on a present value basis The interest expense and related amortization are based on the actual unpaid balance of the debt and the effective interest rate Straight line amortization is an approximation that does not take these factors into consideration The effective interest method is conceptually preferable but the straight line method is used widely in practice because of computational simplicity and the materiality concept E10 17 Computations Interest 2 000 000 x 5 100 000 Present value 2 000 000 x 0 4350 100 000 x 13 2944 Issue price 870 000 1 329 440 2 199 440 Req 1 January 1 Cash A 2 199 440 Premium on Bonds Payable L Bonds Payable L 199 440 2 000 000 Req 2 June 30 Interest Expense E SE 2 199 440 x 4 25 Premium on Bonds Payable L Cash A 93 476 6 524 100 000 Req 3 June 30 2011 Income statement Interest expense Balance sheet Long term Liabilities Bonds payable Plus Unamortized premium 199 440 6 524 E10 19 93 476 2 000 000 192 916 2 192 916 Req 1 Date 1 1 2011 12 31 2011 12 31 2012 12 31 2013 Cash Interest Interest Expense Premium Amortization 500 500 500 10 278 x 4 411 10 189 x 4 408 10 097 x 4 404 89 92 96 Net Liability Balance 10 278 10 189 10 097 10 001 1 rounding error Present value computation Principal 10 000 x 8890 Interest 500 x 2 7751 Issue price 8 890 1 388 10 278 Req 2 December 31 Interest expense Bond liability 2011 2012 2013 411 10 189 408 10 097 404 10 000 M10 11 When a company issues a bond at a discount the interest expense each period will be more than the cash payment for the interest When a company issues a bond at a premium the interest expense will be less than the cash payment for the interest Neither is affected by the method used to amortize the discount or premium ANSWERS TO MULTIPLE CHOICE 1 c 6 b 2 c 7 c 3 b 8 c 4 d 9 a 5 c 10 c