intermediate accounting

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Chapter14BondsPayableDemoNoSolution.xlsx
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Ex 14.6 Bonds Issued at PAR

Example 14.6: On January 1,2016, the Ruffin Corporation issued $40,000 par value, 4%, four-year bonds that mature on December 31, 2019. Ruffin will pay interest quarterly on March 31, June 30, September 30, and December 31. The company's fiscal year ends on December 31. What is the issue price of this bond assuming the market rate of interest is 4%? What is the journal entry to record the bond issue? What are the journal entries to record the first year's interest? What entry is made at maturity?
Since stated interest rate = market interest rate, we can predict and prove that these bonds will be issued at PAR (Face Value)
When we issue the Bonds payable, we promise to pay:
(1) Cash Interest every quarter = Face Value of the Bonds Payable x Qaurterly stated rate
(2) Principal of $40,000 at the end of the 4th year
Every Quarter we will pay cash interest
Annual Market Interest Rate Quarterly Market Interest Rate
4%
Annual Stated Interest Rate Quarterly Stated Interest Rate FV
4%
Years Number of Quarters
4
Face Value of the Bonds Payable
The Bonds payable is issued at PAR. No premium or Discount
Present Value of the Bonds Payable = Face Value - Present Value of the Bonds Payable
Effective Rate Method
= Prior Carrying Value x Quarterly Market Interest Rate
Period Date Cash Interest Effective Interest Discount/Premium Amortized Carrying Value (Prior CV + Discount amortized or - Premium amortized)
0 1/1/16 Initial CV = PV of the Bonds Payable
1 3/31/16
2 6/30/16
3 9/30/16 Balance Sheet Presentation:
4 12/31/16 Bonds Payable
5 3/31/17 Carrying Value
6 6/30/17
7 9/30/17
8 12/31/17
9 3/31/18
10 6/30/18
11 9/30/18
12 12/31/18
13 3/31/19
14 6/30/19
15 9/30/19
16 12/31/19 = Face Value

Ex 14.7 Bonds issued at premium

Example 14.7: On January 1,2016, the Ruffin Corporation issued $40,000 par value, 4%,four-year bonds that mature on December 31, 2019. Ruffin will pay interest semiannually on June 30 and December 31. The company's fiscal year ends on December 31. What is the issue price of this bond assuming that the market rate of interest is 2%? What is the journal entry to record the issuance? Prepare an amortization table using the effective interest rate method. What journal entries are required to record interest expense for the first year? Prepare the journal entry to record the maturity of the bonds. Prepare the t-accounts for the bond payable and bond premium accounts for the life of the bond.
Since stated interest rate 4% > market interest rate 2%, we can predict and prove that these bonds will be issued at a premium (> Face Value)
When we issue the Bonds payable, we promise to pay:
(1) Cash Interest every semiannual year = Face Value of the Bonds Payable x Semiannual stated rate
(2) Principal of $40,000 at the end of the 4th year
Every period we will pay cash interest
Annual Market Interest Rate Semiannual Market Interest Rate
2%
Annual Stated Interest Rate Semiannual Stated Interest Rate FV
4%
Years Number of semiannual periods
4
Face Value of the Bonds Payable
The Bonds payable is issued at a premium
Present Value of the Bonds Payable = Present Value of the Bonds Payable - Face Value
Effective Rate Method
= Prior Carrying Value x Semiannual Market Interest Rate
Period Date Cash Interest Effective Interest Premium Amortized Carrying Value (Prior CV - Premium amortized)
0 1/1/16 Initial CV = PV of the Bonds Payable
1 6/30/16
2 12/28/16
3 6/27/17 Balance Sheet Presentation:
4 12/25/17 Bonds Payable
5 6/24/18 Add: Premium on B/P
6 12/22/18 Carrying Value
7 6/21/19
8 12/19/19 = Face Value

Ex14.8 Bonds issued at discount

Example 14.8: On January 1,2016, the Ruffin Corporation issued $40,000 par value, 4%, four-year bonds that mature on December 31, 2019. Ruffin will pay interest semiannually on June 30 and December 31. On the date Ruffin issued the bonds, the market rate of interest was 6%. The company's fiscal year ends on December 31. What is the issue price of this bond? Prepare the journal entry to record the issuance. Prepare an amortization schedule over the four-year period using the effective interest rate method. Prepare the journal entries to record the inter¬est entries for the first year. Prepare the journal entry to record the payment of the bonds at maturity. Prepare the t-accounts for the bond payable and bond discount accounts for the life of the bond.
Since stated interest rate 4% < market interest rate 6%, we can predict and prove that these bonds will be issued at a discount (< Face Value)
When we issue the Bonds payable, we promise to pay:
(1) Cash Interest every semiannual year = Face Value of the Bonds Payable x Semiannual stated rate
(2) Principal of $40,000 at the end of the 4th year
Every period we will pay cash interest
Annual Market Interest Rate Semiannual Market Interest Rate
6%
Annual Stated Interest Rate Semiannual Stated Interest Rate FV
4%
Years Number of semiannual periods
4
Face Value of the Bonds Payable
The Bonds payable is issued at a discount
Present Value of the Bonds Payable = Face Value - Present Value of the Bonds Payable
Effective Rate Method
= Prior Carrying Value x Semiannual Market Interest Rate
Period Date Cash Interest Effective Interest Discount Amortized Carrying Value (Prior CV + Discount amortized)
0 1/1/16 Initial CV = PV of the Bonds Payable
1 6/30/16
2 12/28/16
3 6/27/17 Balance Sheet Presentation:
4 12/25/17 Bonds Payable
5 6/24/18 Less: Discount on B/P
6 12/22/18 Carrying Value
7 6/21/19
8 12/19/19 = Face Value