Financial Accounting, 8th Edition
Financial Accounting, 8th Edition
8th Edition
ISBN: 9780078025556
Author: Robert Libby, Patricia Libby, Daniel Short
Publisher: McGraw-Hill Education
Question
Book Icon
Chapter 10, Problem 3AP

1.

To determine

Calculate the issue price of the bonds on January 1, 2014.

1.

Expert Solution
Check Mark

Explanation of Solution

Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations.

Bond Discount: It occurs when the bonds are issued at a lower price than the face value.

Straight-line amortization method: It is a method of bond amortization that spreads the amount of the bond discount or bond premium equally over the interest period.

Present Value: The current value of an amount that is to be paid or received in future is called as present value.

Determine the issue price of the bonds.

Step 1: Calculate the cash interest payment for bonds.

Cash interest payment=Face value×Coupon rate×Interest time period=$1,000,000×7%×1=$70,000

Step 2: Calculate the present value of cash interest payment.

ParticularsAmount
Interest payment (a)$70,000
PV factor at annual market interest rate of 9% for 5 periods (b)3.8897
Present value (a)×(b)$272,279

Table (1)

Note: The present value factor for 5 periods at 9% interest would be 3.8897 (Refer Appendix A (Table A.2) in the book for present value factor).

Step 3: Calculate the present value of single principal payment of $1,000,000 (principal amount) at 9% for 5 periods.

ParticularsAmount
Single principal payment (a)$1,000,000
PV factor at annual market interest rate of 9% for 5 periods (b)0.6499
Present value (a)×(b)$649,900

Table (2)

Note: The present value factor for 5 periods at 9% interest would be 0.6499 (Refer Appendix A (Table A.1) in the book for present value factor).

Step 4: Calculate the issue price of the bonds.

Issue price of the bonds =(Present value of interest payment + Present value of single principal payment)=($272,279(from table 1)+$649,900(from table 2))  =$922,179

Conclusion

Hence, the issue price of the bonds on January 1, 2014 is $922,179.

2.

a.

To determine

Calculate the amount of interest expense that should be recorded on December 31, 2014.

2.

a.

Expert Solution
Check Mark

Explanation of Solution

Bonds: Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.

Interest Expense: The cost of debt which is occurred during a particular period of time is called interest expense. The interest amount is payable on the principal amount of debt at a fixed interest rate.

Calculate the amount of interest expense that that should be recorded on December 31, 2014.

Step 1: Calculate cash interest payment.

Cash interest payment=Face value×Coupon rate×Interest time period=$1,000,000×7%×1=$70,000

Step 2: Calculate discount on bonds payable, annually.

 Discount on bonds payable, annually )=Total bond discountNumberofsemiannual=($1,000,000$922,179)5=$15,564 

Step 3: Calculate interest expense.

Interest Expense=Cash interest payment+Bond discount =$70,000+$15,564=$85,564 

Conclusion

Hence, amount of interest expense that should be recorded on December 31, 2014 is $85,564.

b.

To determine

Calculate the amount of interest expense that should be recorded on December 31, 2015.

b.

Expert Solution
Check Mark

Explanation of Solution

Bonds: Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.

Interest Expense: The cost of debt which is occurred during a particular period of time is called interest expense. The interest amount is payable on the principal amount of debt at a fixed interest rate.

Calculate the amount of interest expense that should be recorded on December 31, 2015.

Step 1: Calculate cash interest payment.

Cash interest payment=Face value×Coupon rate×Interest time period=$1,000,000×7%×1=$70,000

Step 2: Calculate discount on bonds payable, annually.

 Discount on bonds payable, annually )=Total bond discountNumberofsemiannual=($1,000,000$922,179)5=$15,564 

Step 3: Calculate interest expense.

Interest Expense=Cash interest payment+Bond discount =$70,000+$15,564=$85,564 

Conclusion

Hence, amount of interest expense that should be recorded on December 31, 2015 is $85,564.

3.

a.

To determine

Calculate the amount of cash interest that should be paid on December 31, 2014.

3.

a.

Expert Solution
Check Mark

Explanation of Solution

Bonds: Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.

Calculate the amount of cash interest that should be paid on December 31, 2014.

Cash interest paid=(Face value of bond ×coupon rate×Interesttime period)$1,000,000×7%×1=$70,000

Conclusion

Hence, amount of cash interest that should be paid on December 31, 2014 is $70,000.

b.

To determine

Calculate the amount of cash interest that should be paid on December 31, 2015.

b.

Expert Solution
Check Mark

Explanation of Solution

Bonds: Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.

Calculate the amount of cash interest that should be paid on December 31, 2015.

Cash interest paid=(Face value of bond ×coupon rate×Interesttime period)$1,000,000×7%×1=$70,000

Conclusion

Hence, amount of cash interest that should be paid on December 31, 2015 is $70,000.

4.

a.

To determine

Calculate the book value of the bonds on December 31, 2014.

4.

a.

Expert Solution
Check Mark

Explanation of Solution

Bonds: Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.

Determine the book value of the bonds on December 31, 2014.

Book value of bond on December 31, 2014) =(Beginning book value of bonds+Discount amortized on December 31, 2014)=$922,179+$15,564=$937,743

Conclusion

Hence, the book value of the bonds on December 31, 2014 is $937,743.

b.

To determine

Calculate the book value of the bonds on December 31, 2015.

b.

Expert Solution
Check Mark

Explanation of Solution

Bonds: Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.

Determine the book value of the bonds on December 31, 2015.

Book value of bond on December 31, 2015 )=(Beginning book value of bonds+Discount amortized on December 31, 2014+Discount amortized on December 31, 2015)=$922,179+$15,564+$15,564=$953,307

Conclusion

Hence, the book value of the bonds on December 31, 2015 is $953,307.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Chapter 10 Solutions

Financial Accounting, 8th Edition

Knowledge Booster
Background pattern image
Recommended textbooks for you
Text book image
FINANCIAL ACCOUNTING
Accounting
ISBN:9781259964947
Author:Libby
Publisher:MCG
Text book image
Accounting
Accounting
ISBN:9781337272094
Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:Cengage Learning,
Text book image
Accounting Information Systems
Accounting
ISBN:9781337619202
Author:Hall, James A.
Publisher:Cengage Learning,
Text book image
Horngren's Cost Accounting: A Managerial Emphasis...
Accounting
ISBN:9780134475585
Author:Srikant M. Datar, Madhav V. Rajan
Publisher:PEARSON
Text book image
Intermediate Accounting
Accounting
ISBN:9781259722660
Author:J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:McGraw-Hill Education
Text book image
Financial and Managerial Accounting
Accounting
ISBN:9781259726705
Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:McGraw-Hill Education