Copyright © 2001 by M. Ray Gregg. All rights reserved. 1 focus

Speakers: Telephony – Charles MCNamara, Cox Comm.Telephony – Charles MCNamara, Cox Comm. Portals – Rob Sellers e-PartnersPortals – Rob Sellers e-Partners Web Technology – Jeff Barnes ScizzortellWeb Technology – Jeff Barnes Scizzortell Students - $25.00 Registration Fee Please see Mrs. Baker (GC3F07, x6669) for more information. Earn PDP and Business Seminar Points CPE credit available

Systems Analyst Internship Williams Company ùThis is a prestigious internship for Junior MIS majors ùMust be familiar with MS Office Products ùWork well in a team environment ùExcellent oral and written communication skills ùSign up for an interview in the College & Career Guidance Center no later than 9:00am on Feb. 16 th ùInterviews on Feb. 24 th ùCall x6912 if you have any questions.

Little Co. Big Corp.

Copyright © 2001 by M. Ray Gregg. All rights reserved. 5

6 A = L + C

Copyright © 2001 by M. Ray Gregg. All rights reserved. 7 A = L + C This Week’s Lesson

Long-Term Liabilities

Copyright © 2001 by M. Ray Gregg. All rights reserved. 9 Objectives Long-Term Liabilities Objectives ùDetermine and record the selling price of the bond ùDetermine and record amortization of ùpremium and ùdiscount using ùstraight-line method ùinterest method

Copyright © 2001 by M. Ray Gregg. All rights reserved. 10 Long-Term Liabilities Obligations incurred when issuing bonds: “I promise I will...” I. Pay “face” at maturity II. Pay periodic interest

Copyright © 2001 by M. Ray Gregg. All rights reserved. 11 Long-Term Liabilities Obligations incurred when issuing bonds: “I promise I will...” I. Pay “face” at maturity II. Pay periodic interest at the contract rate

Copyright © 2001 by M. Ray Gregg. All rights reserved. 12 Long-Term Liabilities Obligations incurred when issuing bonds: “I promise I will...” I. Pay “face” at maturity II. Pay periodic interest at the contract rate on the face amount

Copyright © 2001 by M. Ray Gregg. All rights reserved. 13 Obligations Incurred on Bonds I. x

Copyright © 2001 by M. Ray Gregg. All rights reserved. 14 Obligations Incurred on Bonds I. x II. x x x x x x x x

Copyright © 2001 by M. Ray Gregg. All rights reserved. 15 Rates of Interest ùstated, contract, or coupon rate (specified) ùeffective or market rate (reflected in sales price of the bond)

Copyright © 2001 by M. Ray Gregg. All rights reserved. 16 I promise to pay 8%.

Copyright © 2001 by M. Ray Gregg. All rights reserved. 17 I see I can earn 10% today. I promise to pay 8%.

Copyright © 2001 by M. Ray Gregg. All rights reserved. 18 I see I can earn 10% today. I promise to pay 8%. contract

Copyright © 2001 by M. Ray Gregg. All rights reserved. 19 I see I can earn 10% today. I promise to pay 8%. market contract

Copyright © 2001 by M. Ray Gregg. All rights reserved. 20 I see I can earn 10% today. I promise to pay 8%. market contract market > contract

Copyright © 2001 by M. Ray Gregg. All rights reserved. 21 I see I can earn 10% today. I promise to pay 8%. market contract unattractive market > contract

Copyright © 2001 by M. Ray Gregg. All rights reserved. 22 I see I can earn 10% today. I promise to pay 8%. market contract unattractive market > contract

Copyright © 2001 by M. Ray Gregg. All rights reserved. 23 I see I can earn 10% today. I promise to pay 8%. market contract unattractive = discount market > contract

Copyright © 2001 by M. Ray Gregg. All rights reserved. 24 Bonds for Sale! Getcha 12% bonds right here!

Copyright © 2001 by M. Ray Gregg. All rights reserved. 25 Bonds for Sale! Getcha 12% bonds right here! Bonds Selling at 10% Today

Copyright © 2001 by M. Ray Gregg. All rights reserved. 26 Bonds Selling at 10% Today market contract Bonds for Sale! Getcha 12% bonds right here!

Copyright © 2001 by M. Ray Gregg. All rights reserved. 27 Bonds Selling at 10% Today market contract Bonds for Sale! Getcha 12% bonds right here!

Copyright © 2001 by M. Ray Gregg. All rights reserved. 28 Bonds Selling at 10% Today market < contract Bonds for Sale! Getcha 12% bonds right here!

Copyright © 2001 by M. Ray Gregg. All rights reserved. 29 Bonds Selling at 10% Today market < contract attractive Bonds for Sale! Getcha 12% bonds right here!

Copyright © 2001 by M. Ray Gregg. All rights reserved. 30 Bonds Selling at 10% Today market < contract attractive = premium Bonds for Sale! Getcha 12% bonds right here!

Copyright © 2001 by M. Ray Gregg. All rights reserved. 31 Issuing Bonds at Face

Copyright © 2001 by M. Ray Gregg. All rights reserved. 32 Issuing Bonds at Face Market Rate Selling Price Contract Rate Face

Copyright © 2001 by M. Ray Gregg. All rights reserved. 33 Issuing Bonds at Face Market Rate Selling Price Contract Rate Face Cash face Bonds Payable face

Copyright © 2001 by M. Ray Gregg. All rights reserved. 34 Issuing Bonds at More Than Face

Copyright © 2001 by M. Ray Gregg. All rights reserved. 35 Issuing Bonds at More Than Face Market Rate Selling Price Contract Rate Face

Copyright © 2001 by M. Ray Gregg. All rights reserved. 36 Issuing Bonds at More Than Face Market Rate Selling Price Contract Rate Face Cash rec’d Prem on Bonds Paydiff Bonds Payableface

Copyright © 2001 by M. Ray Gregg. All rights reserved. 37 Issuing Bonds at Less Than Face Market Rate Selling Price Contract Rate Face

Copyright © 2001 by M. Ray Gregg. All rights reserved. 38 Issuing Bonds at Less Than Face Market Rate Selling Price Contract Rate Face Cash rec’d Discount on Bonds Pay diff Bonds Payableface

Copyright © 2001 by M. Ray Gregg. All rights reserved. 39

Copyright © 2001 by M. Ray Gregg. All rights reserved. 40 Contract

Copyright © 2001 by M. Ray Gregg. All rights reserved. 41 Contract Discount

Copyright © 2001 by M. Ray Gregg. All rights reserved. 42 Contract Discount Unattractive

Copyright © 2001 by M. Ray Gregg. All rights reserved. 43 Interest on Your Savings Account

Determining Selling Price of Bonds

Copyright © 2001 by M. Ray Gregg. All rights reserved. 45 Obligations Incurred on Bonds I. x II. x x x x x x x x

Copyright © 2001 by M. Ray Gregg. All rights reserved. 46 Determining Selling Price I. x II. x x x x x x x x

Copyright © 2001 by M. Ray Gregg. All rights reserved. 47 I. x II. x x x x x x x x Determining Selling Price

Copyright © 2001 by M. Ray Gregg. All rights reserved. 48 Present Value of Face + Present Value of Interest = Proceeds from Sale of Bonds

Copyright © 2001 by M. Ray Gregg. All rights reserved. 49 Determining Selling Price I. x II. x x x x x x x x

Copyright © 2001 by M. Ray Gregg. All rights reserved. 50 Exercise Bound Corp issued $260,000, 9%, 10-year bonds on January 1, 2002, for $243,799. This price resulted in an effective interest rate of 10% on the bonds. Interest is payable semiannually on July 1 and January 1. Bound uses the effective-interest method to amortize bond premium or discount. Interest is not accrued on June 30. Prepare the journal entries to record (to the nearest dollar): a) The issuance of the bonds. b) The payment of interest and the discount amortization on July 1, c) The accrual of interest and the discount amortization on December 31, 2002.

Copyright © 2001 by M. Ray Gregg. All rights reserved. 51 Determine the amount of one interest payment: $260,000 x 9% x 6/12 = $11,700

Copyright © 2001 by M. Ray Gregg. All rights reserved. 52 PV of 10% semiannually: $260,000

Copyright © 2001 by M. Ray Gregg. All rights reserved. 53 PV of 10% semiannually: $260,000 x present value “tables” in the text

Copyright © 2001 by M. Ray Gregg. All rights reserved. 54 PV of 10% semiannually: $260,000 x present value “tables” in text Always look up MARKET in the tables

Copyright © 2001 by M. Ray Gregg. All rights reserved. 55 Issuing Bonds at Face Market Rate Selling Price Contract Rate Face

Copyright © 2001 by M. Ray Gregg. All rights reserved. 56 PV of 10% semiannually: $260,000 x.37689

Copyright © 2001 by M. Ray Gregg. All rights reserved. 57 PV of 10% semiannually: $260,000 x.37689=$ 97,991.40

Copyright © 2001 by M. Ray Gregg. All rights reserved. 58 Determining Selling Price I. x II. x x x x x x x x

Copyright © 2001 by M. Ray Gregg. All rights reserved. 59 I. x II. x x x x x x x x Determining Selling Price

Copyright © 2001 by M. Ray Gregg. All rights reserved. 60 PV of 10% semiannually: $260,000 x.37689=$ 97, PV of Interest

Copyright © 2001 by M. Ray Gregg. All rights reserved. 61 Determine the amount of one interest payment: $260,000 x 9% x 6/12 = $11,700

Copyright © 2001 by M. Ray Gregg. All rights reserved. 62 PV of 10% semiannually: $260,000 x.37689=$ 97, PV of Interest $11,700

Copyright © 2001 by M. Ray Gregg. All rights reserved. 63 PV of 10% semiannually: $260,000 x.37689=$ 97, PV of Interest $11,700 x

Copyright © 2001 by M. Ray Gregg. All rights reserved. 64 PV of 10% semiannually: $260,000 x.37689=$ 97, PV of Interest $11,700 x = 145,807.85

Copyright © 2001 by M. Ray Gregg. All rights reserved. 65 PV of 10% semiannually: $260,000 x.37689=$ 97, PV of Interest $11,700 x = 145,807.85

Copyright © 2001 by M. Ray Gregg. All rights reserved. 66 PV of 10% semiannually: $260,000 x.37689=$ 97, PV of Interest $11,700 x = 145, Proceeds from the Sale of Bonds=$243,799.25

Copyright © 2001 by M. Ray Gregg. All rights reserved. 67 Exercise Bound Corp issued $260,000, 9%, 10-year bonds on January 1, 2002, for $243,799. This price resulted in an effective interest rate of 10% on the bonds. Interest is payable semiannually on July 1 and January 1. Bound uses the effective-interest method to amortize bond premium or discount. Interest is not accrued on June 30. Prepare the journal entries to record (to the nearest dollar): a) The issuance of the bonds. b) The payment of interest and the discount amortization on July 1, c) The accrual of interest and the discount amortization on December 31, 2002.

Copyright © 2001 by M. Ray Gregg. All rights reserved. 68 Homework For Problem16-7A, present calculations (similar to those demonstrated here) to support determination of the selling price of the bonds. Allow the amount given in the textbook to serve as a “check figure.” Use lined notebook paper or pages from an unassigned problem in the Working Papers.

Copyright © 2001 by M. Ray Gregg. All rights reserved. 69 PV of 10% semiannually: $260,000 x.37689=$ 97, PV of Interest $11,700 x = 145, Proceeds from the Sale of Bonds=$243, (a) The journal entry to record the sale of the bonds: Cash243,799 Discount on Bonds Payable 16,201 Bonds Payable 260,000

Copyright © 2001 by M. Ray Gregg. All rights reserved. 70 Amortization of PREMIUM or DISCOUNT on Bonds Objectives: 1.to match the correct expense with the correct year 2.to eliminate the related Premium or Discount account

Copyright © 2001 by M. Ray Gregg. All rights reserved. 71 Equipment - Accumulated Depr = Book Value Related Definitions

Copyright © 2001 by M. Ray Gregg. All rights reserved. 72 Equipment - Accumulated Depr = Book Value Bonds Payable + (unamortized) Premium - (unamortized) Discount = Bond Carrying Amount (or Bond Carrying Value) Related Definitions

Copyright © 2001 by M. Ray Gregg. All rights reserved. 73 Amortization of PREMIUM or DISCOUNT on Bonds Objectives: 1.to match the correct expense with the correct year 2.to eliminate the related Premium or Discount account or to change the BCA (BCV) to FACE by maturity

Copyright © 2001 by M. Ray Gregg. All rights reserved. 74 Recording Amortization Amortization of Premium Premium on Bonds Payableamt Interest Expenseamt Amortization of Discount Interest Expenseamt Discount on Bonds Payableamt

Copyright © 2001 by M. Ray Gregg. All rights reserved. 75 Determining Amortization Amount Straight-Line Method (Effective) Interest Method

Copyright © 2001 by M. Ray Gregg. All rights reserved. 76 Straight-Line Method Premium or Discount = same amount to each period periods

Copyright © 2001 by M. Ray Gregg. All rights reserved. 77 (Effective) Interest Method (see Appendix pp at end of chapter) Interest PAID (face x contract) Interest INCURRED (BCA x market) Amount of Amortization

Copyright © 2001 by M. Ray Gregg. All rights reserved. 78 Exercise Bound Corp issued $260,000, 9%, 10-year bonds on January 1, 2002, for $243,799. This price resulted in an effective interest rate of 10% on the bonds. Interest is payable semiannually on July 1 and January 1. Bound uses the effective-interest method to amortize bond premium or discount. Interest is not accrued on June 30. Prepare the journal entries to record (to the nearest dollar): a) The issuance of the bonds. b) (1) The payment of interest and the discount amortization on July 1, 2002, and (2) amortization of the discount (using the effective interest method). c) The accrual of interest and the discount amortization on December 31, 2002.

Copyright © 2001 by M. Ray Gregg. All rights reserved. 79 Determine the amount of one interest payment: $260,000 x 9% x 6/12 = $11,700

Copyright © 2001 by M. Ray Gregg. All rights reserved. 80 First Interest Payment (b) (1) Bond Interest Expense 11,700 Cash11,700

Copyright © 2001 by M. Ray Gregg. All rights reserved. 81 Exercise Bound Corp issued $260,000, 9%, 10-year bonds on January 1, 2002, for $243,799. This price resulted in an effective interest rate of 10% on the bonds. Interest is payable semiannually on July 1 and January 1. Bound uses the effective-interest method to amortize bond premium or discount. Interest is not accrued on June 30. Prepare the journal entries to record (to the nearest dollar): a) The issuance of the bonds. b) (1) The payment of interest and the discount amortization on July 1, 2002, and (2) amortization of the discount (using the effective interest method). c) The accrual of interest and the discount amortization on December 31, 2002.

Copyright © 2001 by M. Ray Gregg. All rights reserved. 82 Amortization in Separate Entry (b) (1) Bond Interest Expense 11,700 Cash11,700 (b) (2) Bond Interest Expense??? Discount on Bonds Pay ???

Copyright © 2001 by M. Ray Gregg. All rights reserved. 83 (Effective) Interest Method (see Appendix pp at end of chapter) Interest PAID (face x contract) Interest INCURRED (BCA x market) Amount of Amortization

Copyright © 2001 by M. Ray Gregg. All rights reserved. 84

Copyright © 2001 by M. Ray Gregg. All rights reserved. 85

Copyright © 2001 by M. Ray Gregg. All rights reserved. 86 Determine Amount of Amortization (refer to example “charts” on pages 702 and 704)

Copyright © 2001 by M. Ray Gregg. All rights reserved. 87 PV of 10% semiannually: $260,000 x.37689=$ 97, PV of Interest $11,700 x = 145, Proceeds from the Sale of Bonds=$243, (a) The journal entry to record the sale of the bonds: Cash243,799 Discount on Bonds Payable 16,201 Bonds Payable 260,000

Copyright © 2001 by M. Ray Gregg. All rights reserved. 88 Determine Amount of Amortization (refer to example “charts” on pages 702 and 704)

Copyright © 2001 by M. Ray Gregg. All rights reserved. 89 Determine Amount of Amortization (refer to example “charts” on pages 702 and 704)

Copyright © 2001 by M. Ray Gregg. All rights reserved. 90 Determine Amount of Amortization (refer to example “charts” on pages 702 and 704)

Copyright © 2001 by M. Ray Gregg. All rights reserved. 91 Amortization in Separate Entry (b) (1) Bond Interest Expense 11,700 Cash11,700 (b) (2) Bond Interest Expense490 Discount on Bonds Pay 490

Copyright © 2001 by M. Ray Gregg. All rights reserved. 92 Textbook’s Illustration (b) Bond Interest Expense 12,190 Disc on Bonds Pay 490 Cash11,700

Copyright © 2001 by M. Ray Gregg. All rights reserved. 93 Exercise Bound Corp issued $260,000, 9%, 10-year bonds on January 1, 1999, for $243,799. This price resulted in an effective interest rate of 10% on the bonds. Interest is payable semiannually on July 1 and January 1. Bound uses the effective-interest method to amortize bond premium or discount. Interest is not accrued on June 30. Prepare the journal entries to record (to the nearest dollar): a) The issuance of the bonds. b) (1) The payment of interest and the discount amortization on July 1, 2000, and (2) amortization of the discount (using the effective interest method). c) (1) The accrual of interest and (2) the discount amortization on December 31, 2000.

Copyright © 2001 by M. Ray Gregg. All rights reserved. 94 Accrual of Interest (c) (1) Bond Interest Expense 11,700 Bond Interest Pay11,700

Copyright © 2001 by M. Ray Gregg. All rights reserved. 95 Amortization of Discount (c) (1) Bond Interest Expense 11,700 Bond Interest Pay11,700 (c) (2) Bond Interest Expense??? Discount on Bonds Pay ???

Copyright © 2001 by M. Ray Gregg. All rights reserved. 96 Determine Amount of Amortization (refer to example “charts” on pages 665 and 666)

Copyright © 2001 by M. Ray Gregg. All rights reserved. 97 Determine Amount of Amortization (refer to example “charts” on pages 665 and 666)

Copyright © 2001 by M. Ray Gregg. All rights reserved. 98 Determine Amount of Amortization (refer to example “charts” on pages 665 and 666)

Copyright © 2001 by M. Ray Gregg. All rights reserved. 99 Determine Amount of Amortization (refer to example “charts” on pages 665 and 666)

Copyright © 2001 by M. Ray Gregg. All rights reserved. 100 Amortization of Discount (c) (1) Bond Interest Expense 11,700 Bond Interest Pay11,700 (c) (2) Bond Interest Expense514 Discount on Bonds Pay 514

Copyright © 2001 by M. Ray Gregg. All rights reserved. 101 Payment on January 1 Bond Interest Payable 11,700 Cash11,700

Copyright © 2001 by M. Ray Gregg. All rights reserved. 102 Determine Amount of Amortization (refer to example “charts” on pages 665 and 666)