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a) After completing all of the entries in Exercise 6, what is the correct debit balance recorded to the Interest Expense account? See circle on
a) After completing all of the entries in Exercise 6, what is the correct debit balance recorded to the Interest Expense account? See circle on the printed exercise. (5 points for correct answer. No partial credit). b) After completing all of the entries for the Straight-Line portion in Exercise 8, what is the cash proceeds upon issuance of the bond? See circle on the printed exercise. (5 points for correct answer. No partial credit). c) After completing all of the entries for the Effective Interest Rate portion in Exercise 8, what is the correct Premium Amortization amount for the first interest period (from table)? See circle on the printed exercise. (5 points for correct answer. No partial credit). d) After completing all of the entries in Exercise 10, what is the correct amount recorded to the Loss on Retirement of Bonds account? See circle on the printed exercise. (5 points for correct answer. No partial credit). Exercise 6: Complete the following example for a bond issued at a price of 106 . T-accts below. The same bond from Exercise 4 is issued at a price of 106. This price indicates that the Effective rate of interest is less than the Stated rate of interest. As a result, the bond issues at a Premium. 1. Entry required upon issuance of the bond. Cash proceeds: $[1 Note: Even though a Premium is recorded, the company must still repay just $50,000 at the end of the bond term. 2. Entry on first interest payment date: a. Actual Interest payment b. Amortization of the Premium $ %6/12=$ Interest periods =$ NOTE: Much like amortizing a discount, use the total number of interest periods to amortize the premium using the straight-line method. In this case the premium amortization effectively decreases Interest Expense. Why? Once again, since the bond was issued at a premium the company received cash proceeds greater than the principal amount ($50,000). However, the company only has to pay back the principal at the end of the bond term. So, the premium received up front effectively reduces the overall interest expense to the company over the life of the bond. Another way to think about it is that the interest paid combined with the premium amortization lowers the Interest Expense recognized to the full Effective rate of interest (remember in this case the Effective rate was less than the Stated rate). In the end, the company will really pay the Effective (market) rate of interest over the life of the bond. InI IRNAI FNITRIEC. Exercise 8: Complete the following problem. A $20,000,2 year, 10% (Stated rate) bond is sold when the Effective (Market) rate is 8%. The bond pays interest semi-annually. Assuming a price of 104 at issuance record the following. 1. Entry required upon issuance of the bond. Cashproceeds:$$ 2. Entry on the first interest payment date. Use STRAIGHT-LINE method for amortization. a. Actual Interest payment %6/12=$ periods =$ b. Amortization of the Premium using the STRAIGHT-LINE method. $ 3. Entry on the second interest payment date. Use STRAIGHT-LINE method for amortization. a. Actual Interest payment b. Amortization of the Premium using the STRAIGHT-LINE method. Next, use the t-accounts below the table to repeat the same three steps (from above) but this time use the EFFECTIVE INTEREST RATE METHOD. Round any calculations to the nearest dollar. Bond Retirements: If a bond has a "callable" feature attached, the company may elect to pay off (retire) the bond early (i.e. before the bond term expires). Example 9: Review the completed example below. A company has a $500,000 callable bond with a $7,000 premium on the books. These balances are reflected in the t-accts below. The bond is retired at a price of 102 . Review these steps to record the retirement entry. 1) Determine how much cash must be paid and record in the T-acct. $500,0001.02=$510,000 2) Record entry to zero out the Bonds Payable account. 3) Record entry to zero out the Premium account. 4) Add up your debits and credits to this point. If you need a debit to balance out the entry, record it to a "Loss on Retirement of Bonds" account. If you need a credit to balance out the entry, record it to a "Gain on Retirement of Bonds account. In this example, a loss is recorded. What if the bonds were called at a price of 101?$500,0001.01=505,000 Example 10: Use the t-accounts below to record the following bond retirement. A $200,000 callable bond with a $5,000 discount is called at a price of 104 . a) After completing all of the entries in Exercise 6, what is the correct debit balance recorded to the Interest Expense account? See circle on the printed exercise. (5 points for correct answer. No partial credit). b) After completing all of the entries for the Straight-Line portion in Exercise 8, what is the cash proceeds upon issuance of the bond? See circle on the printed exercise. (5 points for correct answer. No partial credit). c) After completing all of the entries for the Effective Interest Rate portion in Exercise 8, what is the correct Premium Amortization amount for the first interest period (from table)? See circle on the printed exercise. (5 points for correct answer. No partial credit). d) After completing all of the entries in Exercise 10, what is the correct amount recorded to the Loss on Retirement of Bonds account? See circle on the printed exercise. (5 points for correct answer. No partial credit). Exercise 6: Complete the following example for a bond issued at a price of 106 . T-accts below. The same bond from Exercise 4 is issued at a price of 106. This price indicates that the Effective rate of interest is less than the Stated rate of interest. As a result, the bond issues at a Premium. 1. Entry required upon issuance of the bond. Cash proceeds: $[1 Note: Even though a Premium is recorded, the company must still repay just $50,000 at the end of the bond term. 2. Entry on first interest payment date: a. Actual Interest payment b. Amortization of the Premium $ %6/12=$ Interest periods =$ NOTE: Much like amortizing a discount, use the total number of interest periods to amortize the premium using the straight-line method. In this case the premium amortization effectively decreases Interest Expense. Why? Once again, since the bond was issued at a premium the company received cash proceeds greater than the principal amount ($50,000). However, the company only has to pay back the principal at the end of the bond term. So, the premium received up front effectively reduces the overall interest expense to the company over the life of the bond. Another way to think about it is that the interest paid combined with the premium amortization lowers the Interest Expense recognized to the full Effective rate of interest (remember in this case the Effective rate was less than the Stated rate). In the end, the company will really pay the Effective (market) rate of interest over the life of the bond. InI IRNAI FNITRIEC. Exercise 8: Complete the following problem. A $20,000,2 year, 10% (Stated rate) bond is sold when the Effective (Market) rate is 8%. The bond pays interest semi-annually. Assuming a price of 104 at issuance record the following. 1. Entry required upon issuance of the bond. Cashproceeds:$$ 2. Entry on the first interest payment date. Use STRAIGHT-LINE method for amortization. a. Actual Interest payment %6/12=$ periods =$ b. Amortization of the Premium using the STRAIGHT-LINE method. $ 3. Entry on the second interest payment date. Use STRAIGHT-LINE method for amortization. a. Actual Interest payment b. Amortization of the Premium using the STRAIGHT-LINE method. Next, use the t-accounts below the table to repeat the same three steps (from above) but this time use the EFFECTIVE INTEREST RATE METHOD. Round any calculations to the nearest dollar. Bond Retirements: If a bond has a "callable" feature attached, the company may elect to pay off (retire) the bond early (i.e. before the bond term expires). Example 9: Review the completed example below. A company has a $500,000 callable bond with a $7,000 premium on the books. These balances are reflected in the t-accts below. The bond is retired at a price of 102 . Review these steps to record the retirement entry. 1) Determine how much cash must be paid and record in the T-acct. $500,0001.02=$510,000 2) Record entry to zero out the Bonds Payable account. 3) Record entry to zero out the Premium account. 4) Add up your debits and credits to this point. If you need a debit to balance out the entry, record it to a "Loss on Retirement of Bonds" account. If you need a credit to balance out the entry, record it to a "Gain on Retirement of Bonds account. In this example, a loss is recorded. What if the bonds were called at a price of 101?$500,0001.01=505,000 Example 10: Use the t-accounts below to record the following bond retirement. A $200,000 callable bond with a $5,000 discount is called at a price of 104
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