Financial Accounting
Financial Accounting
10th Edition
ISBN: 9781260481563
Author: Libby, Robert
Publisher: MCGRAW-HILL HIGHER EDUCATION
bartleby

Videos

Question
Book Icon
Chapter 10, Problem 6P

1.

To determine

Calculate the issuance price of the bonds on January 1 of this Year.

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.

Effective-interest method of amortization: It is an amortization model that apportions the amount of bond discount or premium based on the market interest rate.

Present Value: The value of today’s amount expected to be paid or received in the future at a compound interest rate is called as present value.

Determine the issuance price of the bonds.

Step 1: Calculate the cash interest payment for bonds.

Cash interest payment=Face value×Coupon rate×Interest time period=$1,000,000×10%×12=$50,000

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

ParticularsAmount
Interest payment (a)$50,000
PV factor at annual market interest rate of 6% for 20 periods (b)11.4699
Present value (a)×(b)$573,495

Table (1)

Note: The present value factor for 20 periods at 6% interest would be 11.4699 (Refer Appendix E (Table E.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 6% for 20 periods.

ParticularsAmount
Single principal payment (a)$1,000,000
PV factor at annual market interest rate of 6% for 20 periods (b)0.31180
Present value (a)×(b)$311,800

Table (2)

Note: The present value factor for 20 periods at 6% interest would be 0.31180 (Refer Appendix E (Table E.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)=($573,495(from table 1)+$311,800(from table 2))  =$885,295

Conclusion

Hence, The issuance price of the bonds on January 1 of this Year is $885,295.

2.

To determine

Calculate the amount of interest expense that should be recorded on June 30 of this year.

2.

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 June 30 of this year.

Interest expense=(Book value of bond (issue price)×Market interest rate×Interesttime period)= $885,295×12%×12=$53,118

Conclusion

Hence, amount of interest expense that should be recorded on June 30 of this year is $53,118.

To determine

Calculate the amount of interest expense that should be recorded on December 31 of this year.

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 of this year.

Interest expense=(Book value of bond ×Market interest rate×Interesttime period)($885,295+($53,118$50,000))×12%×12=$53,305

Conclusion

Hence, amount of interest expense that should be recorded on December 31 of this year is $53,305.

3.

To determine

Calculate the amount of cash that should be paid to investors on June 30 of this year.

3.

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 that should be paid to investors on June 30 of this year.

Cash paid=(Face value of bond ×coupon rate×Interesttime period)= $1,000,000×10%×12=$50,000

Conclusion

Hence, amount of cash that should be paid to investors on June 30 of this year is $50,000.

To determine

Calculate the amount of cash that should be paid to investors on December 31 of this year.

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 that should be paid to investors on December 31 of this year.

Cash paid=(Face value of bond ×coupon rate×Interesttime period)= $1,000,000×10%×12=$50,000

Conclusion

Hence, amount of cash that should be paid to investors on December 31 of this year is $50,000.

4.

To determine

Calculate the book value of the bonds on June 30 of this year.

4.

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 June 30 of this year.

Book value of bond on June 30 =(Beginning book value of bonds+Discount amortized on June 30)=($885,295+($53,118$50,000))=$888,413

Conclusion

Hence, the book value of the bonds on June 30 of this year is $888,413.

To determine

Calculate the book value of the bonds on December 31 of this year.

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 of this year.

Book value of bond on December 31 =(Beginning book value of bonds+Discount amortized on June 30+Discount amortized on December 31)=($885,295+($53,118$50,000)+($53,305$50,000))=$891,718

Conclusion

Hence, the book value of the bonds on December 31 of this year is $891,718.

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

Ch. 10 - 11. How is the debt-to-equity ratio computed? What...Ch. 10 - 12. When market interest rates increase, do bond...Ch. 10 - 1. Annual interest expense for a single bond issue...Ch. 10 - Which of the following is an advantage of issuing...Ch. 10 - 3. A bond with a face value of $100,000 has a...Ch. 10 - Prob. 4MCQCh. 10 - 5. Which of the following is false when a bond is...Ch. 10 - 6. A bond with a face value of $100,000 was issued...Ch. 10 - 7. To determine whether a bond will be sold at a...Ch. 10 - Prob. 8MCQCh. 10 - Prob. 9MCQCh. 10 - 10. When using the effective-interest method of...Ch. 10 - Prob. 1MECh. 10 - M10-2 Computing the Price of a Bond Issued at...Ch. 10 - Prob. 3MECh. 10 - M10-4 Computing the Times Interest Earned...Ch. 10 - Computing the Price of a Bond Issued at a...Ch. 10 - Recording the Issuance and Interest Payments of a...Ch. 10 - (Chapter Supplement) Recording the Issuance and...Ch. 10 - Computing the Price of a Bond Issued at a...Ch. 10 - Prob. 9MECh. 10 - (Chapter Supplement) Recording the Issuance and...Ch. 10 - Prob. 11MECh. 10 - (Chapter Supplement) Recording the Issuance and...Ch. 10 - Prob. 13MECh. 10 - M10-14 The Cash Flow Effects of Retiring Bonds and...Ch. 10 - E10-1 Interpreting Information Reported in the...Ch. 10 - Prob. 2ECh. 10 - E10-3 Computing Issue Prices of Bonds Sold at Par,...Ch. 10 - E10-4 Computing Issue Prices of Bonds Sold at Par,...Ch. 10 - Determining the Effects of Issuing Bonds on the...Ch. 10 - Analyzing Financial Ratios You have just started...Ch. 10 - Assume General Motors Corporation is planning to...Ch. 10 - Prob. 8ECh. 10 - (Chapter Supplement) Recording and Reporting a...Ch. 10 - Prob. 10ECh. 10 - E10-11 Interpreting a Bond Amortization...Ch. 10 - E10-12 Explaining Why Debt Is Issued at a Price...Ch. 10 - E10-13 Recording and Reporting a Bond Issued at a...Ch. 10 - (Chapter Supplement) Recording and Reporting a...Ch. 10 - Prob. 15ECh. 10 - Prob. 16ECh. 10 - Recording the Early Retirement of a Bond Several...Ch. 10 - Recording the Early Retirement of a Bond Issued at...Ch. 10 - (Chapter Supplement) Recording the Early...Ch. 10 - Prob. 20ECh. 10 - E10-21 (Chapter Supplement) Recording and...Ch. 10 - E10-22 Recording and Reporting a Bond Issued at a...Ch. 10 - E10-23 (Chapter Supplement) Recording and...Ch. 10 - Prob. 24ECh. 10 - Analyzing the Use of Debt Last year. Arbor...Ch. 10 - Prob. 2PCh. 10 - Comparing Bonds Issued at Par, at a Discount, and...Ch. 10 - Computing Issue Prices of Bonds Sold at Par, at a...Ch. 10 - Prob. 5PCh. 10 - Prob. 6PCh. 10 - Prob. 7PCh. 10 - Prob. 8PCh. 10 - Prob. 9PCh. 10 - Preparing a Bond Amortization Schedule for a Bond...Ch. 10 - Prob. 11PCh. 10 - Prob. 12PCh. 10 - P10-13 Recording the Early Retirement of a Bond...Ch. 10 - Prob. 14PCh. 10 - Prob. 15PCh. 10 - Prob. 16PCh. 10 - AP10-1 Reporting Bonds Issued at Par LO 10-2 On...Ch. 10 - Prob. 2APCh. 10 - Prob. 3APCh. 10 - Recording and Reporting a Bond Issued at a...Ch. 10 - (Chapter Supplement) Recording and Reporting a...Ch. 10 - Prob. 6APCh. 10 - AP10-7 Recording and Reporting a Bond Issued at a...Ch. 10 - Prob. 8APCh. 10 - Prob. 1CONCh. 10 - Finding Financial Information Refer to the...Ch. 10 - Prob. 2CPCh. 10 - Refer to the financial statements and footnotes of...Ch. 10 - Prob. 4CPCh. 10 - Prob. 5CPCh. 10 - Prob. 6CP
Knowledge Booster
Background pattern image
Accounting
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
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
Financial Accounting - Long-term Liabilities - Bonds; Author: Finance & Accounting Videos by Prof Coram;https://www.youtube.com/watch?v=_1fwsJIGMos;License: Standard Youtube License