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Business Accounting Fundamental Accounting Principles

Amortization of bond discounts using Effective Method: The issuance of bond at a price lower than the par value or face value of the bond indicates that bonds are issued at a discount when the interest rate stated is comparatively less than the market interest rates by which the investors earn a good return on their investment. In such a scenario, the discount amount which is the difference between the bond par value and the amount paid by the investors is recorded in a contra liability amount and the amount of reduced payment after discount is amortized over the term of the bonds. Effective interest rate is the method of amortizing the bond premium where the amount of interest expense in a given year will correlate with the book value of the bond. Requirement-1: To determine: The cash proceeds of Garcia Company from the issuance of 10%, 15 year bonds with par value of $ 240 , 000 with semi-annual payments. Solution: Cash proceeds of Garcia Company is $ 1 8 0 , 6 0 0 Below is the explanation for the computation of cash proceeds. The par value of bonds issued is $ 240 , 000 The selling price on the date of issuance is 75 ¼ % Hence the cash proceeds is $ 2 4 0 , 0 0 0 * 7 5 ¼ % = $ 1 8 0 , 6 0 0 Requirement-2: To determine: The amount of bond interest expense that is recognized over the life of 15 years bond issued by the Garcia Company having semi-annual payment of interest. Solution: Payment of interest for 15 years period is made twice in a year since semi-annual interest payments is used. Hence the payment of interest is calculated for 30 times i.e.15 years* 2 times and the interest amount is divided by two to indicate interest paid twice a year. Requiremet-3: To determine: The amount of interest expense on bonds issued that is recorded on the first interest payment date. Solution: The amount of bond interest expense payable is $ 1 8 0 , 6 0 0 * 1 4 % * 6 / 1 2 = $ 1 2 , 6 4 2 The amount of bond cash borrowed is $ 180 , 600 (As calculated in Requirement-1) The market rate of bond is 14% annually. Since the Garcia issued bonds for semi-annual interest payments the interest expense is calculated for six months. Hence the amount of interest expense payable is $ 12 , 642 .

Amortization of bond discounts using Effective Method: The issuance of bond at a price lower than the par value or face value of the bond indicates that bonds are issued at a discount when the interest rate stated is comparatively less than the market interest rates by which the investors earn a good return on their investment. In such a scenario, the discount amount which is the difference between the bond par value and the amount paid by the investors is recorded in a contra liability amount and the amount of reduced payment after discount is amortized over the term of the bonds. Effective interest rate is the method of amortizing the bond premium where the amount of interest expense in a given year will correlate with the book value of the bond. Requirement-1: To determine: The cash proceeds of Garcia Company from the issuance of 10%, 15 year bonds with par value of $ 240 , 000 with semi-annual payments. Solution: Cash proceeds of Garcia Company is $ 1 8 0 , 6 0 0 Below is the explanation for the computation of cash proceeds. The par value of bonds issued is $ 240 , 000 The selling price on the date of issuance is 75 ¼ % Hence the cash proceeds is $ 2 4 0 , 0 0 0 * 7 5 ¼ % = $ 1 8 0 , 6 0 0 Requirement-2: To determine: The amount of bond interest expense that is recognized over the life of 15 years bond issued by the Garcia Company having semi-annual payment of interest. Solution: Payment of interest for 15 years period is made twice in a year since semi-annual interest payments is used. Hence the payment of interest is calculated for 30 times i.e.15 years* 2 times and the interest amount is divided by two to indicate interest paid twice a year. Requiremet-3: To determine: The amount of interest expense on bonds issued that is recorded on the first interest payment date. Solution: The amount of bond interest expense payable is $ 1 8 0 , 6 0 0 * 1 4 % * 6 / 1 2 = $ 1 2 , 6 4 2 The amount of bond cash borrowed is $ 180 , 600 (As calculated in Requirement-1) The market rate of bond is 14% annually. Since the Garcia issued bonds for semi-annual interest payments the interest expense is calculated for six months. Hence the amount of interest expense payable is $ 12 , 642 .

Fundamental Accounting Principles

Fundamental Accounting Principles

23rd Edition

ISBN: 9781259536359

Author: John J Wild, Ken Shaw Accounting Professor, Barbara Chiappetta Fundamental Accounting Principles

Publisher: McGraw-Hill Education

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Chapter 14, Problem 13QS

Chapter 14, Problem 15QS

Chapter 14 Solutions

Fundamental Accounting Principles

Ch. 14 - Prob. 1DQ Ch. 14 - Prob. 2DQ Ch. 14 - Prob. 3DQ Ch. 14 - Prob. 4DQ Ch. 14 - Prob. 5DQ Ch. 14 - Prob. 6DQ Ch. 14 - Prob. 7DQ Ch. 14 - Prob. 8DQ Ch. 14 - Prob. 9DQ Ch. 14 - Prob. 10DQ

Ch. 14 - Prob. 11DQ Ch. 14 - Prob. 12DQ Ch. 14 - Prob. 13DQ Ch. 14 - Prob. 14DQ Ch. 14 - Prob. 15DQ Ch. 14 - Prob. 16DQ Ch. 14 - Prob. 17DQ Ch. 14 - Prob. 18DQ Ch. 14 - Prob. 19DQ Ch. 14 - Prob. 20DQ Ch. 14 - Prob. 1QS Ch. 14 - Prob. 2QS Ch. 14 - Prob. 3QS Ch. 14 - Prob. 4QS Ch. 14 - Prob. 5QS Ch. 14 - Prob. 6QS Ch. 14 - Prob. 7QS Ch. 14 - Prob. 8QS Ch. 14 - Prob. 9QS Ch. 14 - Prob. 10QS Ch. 14 - Prob. 11QS Ch. 14 - Prob. 12QS Ch. 14 - Prob. 13QS Ch. 14 - Prob. 14QS Ch. 14 - Prob. 15QS Ch. 14 - Prob. 16QS Ch. 14 - Prob. 17QS Ch. 14 - Prob. 18QS Ch. 14 - Prob. 19QS Ch. 14 - Prob. 20QS Ch. 14 - Prob. 1E Ch. 14 - Prob. 2E Ch. 14 - Prob. 3E Ch. 14 - Prob. 4E Ch. 14 - Prob. 5E Ch. 14 - Prob. 6E Ch. 14 - Prob. 7E Ch. 14 - Prob. 8E Ch. 14 - Prob. 9E Ch. 14 - Prob. 10E Ch. 14 - Prob. 11E Ch. 14 - Prob. 12E Ch. 14 - Prob. 13E Ch. 14 - Prob. 14E Ch. 14 - Prob. 15E Ch. 14 - Prob. 16E Ch. 14 - Prob. 17E Ch. 14 - Prob. 18E Ch. 14 - Prob. 19E Ch. 14 - Prob. 20E Ch. 14 - Prob. 1APSA Ch. 14 - Prob. 2APSA Ch. 14 - Prob. 3APSA Ch. 14 - Prob. 4APSA Ch. 14 - Prob. 5APSA Ch. 14 - Prob. 6APSA Ch. 14 - Prob. 7APSA Ch. 14 - Prob. 8APSA Ch. 14 - Prob. 9APSA Ch. 14 - Prob. 10APSA Ch. 14 - Prob. 11APSA Ch. 14 - Prob. 1BPSB Ch. 14 - Prob. 2BPSB Ch. 14 - Prob. 3BPSB Ch. 14 - Prob. 4BPSB Ch. 14 - Prob. 5BPSB Ch. 14 - Prob. 6BPSB Ch. 14 - Prob. 7BPSB Ch. 14 - Prob. 8BPSB Ch. 14 - Prob. 9BPSB Ch. 14 - Prob. 10BPSB Ch. 14 - Problem 14-11EC Capital lease accounting C3 Braun...Ch. 14 - Prob. 14SP Ch. 14 - Prob. 1BTN Ch. 14 - Prob. 2BTN Ch. 14 - Prob. 3BTN Ch. 14 - Prob. 4BTN Ch. 14 - Prob. 5BTN Ch. 14 - Prob. 6BTN Ch. 14 - Prob. 7BTN Ch. 14 - Prob. 8BTN Ch. 14 - Prob. 9BTN

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