Long-Term Liabilities

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Presentation transcript:

Long-Term Liabilities Chapter 12 Exercises

Journalizing Bond Transactions In-Class Exercises (Form groups and work exercises): Exercise No. Page E12-22 730 Journalizing Bond Transactions (Use the format, as reflected on the next slide, to complete this exercise)

Journalizing Bond Transactions General Journal Date Description Debit Credit Exercise Page E12-22 730 Journalizing Bond Transactions

Bond Pricing Exercise E12-22: Clark issued $50,000 of 10-year, 9% bonds payable on January 1, 2014. Clark pays interest each January 1 and July 1 and amortizes discount or premium by the straight-line method. The company can issue its bond payable under various conditions. Requirements: Journalize Clark’s issuance of the bonds and first semiannual interest payment, assuming the bonds were issued at face value. Journalize Clark’s issuance of the bonds and first semiannual interest payment, assuming the bonds were issued at 95. Journalize Clark’s issuance of the bonds and first semiannual interest payment, assuming the bonds were issued at 106.

Journalizing Bond Transactions Bonds issued at face value $50,000 x .09 x 6/12 = $2,250

Journalizing Bond Transactions Bonds issued at .95 $50,000 x .95 = $47,500

Journalizing Bond Transactions Bonds issued at .95 $50,000 - $47,500 = $2,500

Journalizing Bond Transactions Bonds issued at .95 ? $2,500 ÷ 20 = $125

Journalizing Bond Transactions Bonds issued at .95 $2,250 + $125 = $2,375

Journalizing Bond Transactions Bonds issued at 1.06 $50,000 x 1.06 = $53,000

Journalizing Bond Transactions Bonds issued at 1.06 $53,000 - $50,000 = $3,000

Journalizing Bond Transactions Bonds issued at 1.06 ? $3,000 ÷ 20 = $150

Journalizing Bond Transactions Bonds issued at 1.06 $2,250 - $150 = $2,100

Journalizing Bond Transactions End of Exercise

Journalizing Bond Transactions In-Class Exercises (Form groups and work exercises): Exercise No. Page E12-28 731 Present Value of Bonds Payable (Use the format, as reflected on the next slide, to complete this exercise)

Pricing Bonds Using Present Value Prepare this schedule for each of the three stated requirements.

Pricing Bonds Using Present Value Exercise E12-28: Interest rates determine the present value selling price of bonds. (Round all numbers to the nearest whole dollar) Requirements: Determine the present vale of 7-year bonds payable, with a face value of $91,000, and stated (contract) interest rate of 14%. The market rate is 14% at issuance. Same bonds payable as in Requirement 1, but the market interest rate is 16%. Same bonds payable as in Requirement 1, but the market interest rate is 12%. Note: First, determine the periodic interest payment, using the contract rate of interest.

Pricing Bonds Using Present Value Determining Bond Interest Payment First, we need to calculate the semi-annual interest payment to be made to the bondholders. Equation: Principal x contract rate / 2 $91,000 x .14 = $12,740 / 2 = $6,370

Pricing Bonds Using Present Value

Pricing Bonds Using Present Value

Pricing Bonds Using Present Value

Pricing Bonds Using Present Value End of Exercise

Effective Interest Amortization Method In-Class Exercise (Form groups and work exercise): Exercise No. Page E12B-29 732 Effective Interest Amortization Method (Use the format, as reflected on the next slide, to complete the exercise)

Effective Interest Amortization Method Exercise E12B-29: Use your answers from Requirements 1-3 of Exercise E12A-28. Journalize issuance of the bond and the first semiannual interest payment under each of the three assumptions in Exercise E12A-28. The company amortizes bond premium and discount by the effective-interest amortization method.

Effective Interest Amortization Method Market Rate = 14%

Effective Interest Amortization Method Market Rate = 16% $91,000 - $83,454 = $7,546

Effective Interest Amortization Method Market Rate = 16% $83,454 x .08 = $6,676

Effective Interest Amortization Method Market Rate = 16% $6,676 - $6,370 = $306

Effective Interest Amortization Method Market Rate = 12% $99,431 - $91,000 = $8,431

Effective Interest Amortization Method Market Rate = 12% $99,431 x .06 = $5,966

Effective Interest Amortization Method Market Rate = 12% $6,370 - $5,966 = $404

Effective Interest Amortization Method End of Exercise