1 Illustration 1 : Present Value Calculations PV of interest annuity: PVA Table PVA Table PVA = A( ) = i, n i = 6%, n=5 PV of face value: PV1 Table PV1.

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1 Illustration 1 : Present Value Calculations PV of interest annuity: PVA Table PVA Table PVA = A( ) = i, n i = 6%, n=5 PV of face value: PV1 Table PV1 Table PV =FV1( ) = i, n I = 6%, n=5 Total issue price = Issued at a discount of $4,212 because the company was offering an interest rate less than the market rate, and investors were not willing to pay as much for the lower interest rate. 5,000 ( ) = $21, ,000( )=$74,726 $95,788

2 Illustration 1 : Journal Entry at Issue JE at 1/1/06 to issue the bonds: Discount on Bonds Payable is located in the liability section of the balance sheet, as a contra, and offsets Bonds Payable. On the balance sheet at 1/1/06: Liabilities Bonds Payable Discount on B/P (the carrying value is 95,788) Cash 95,788 Discount on B/P 4,212 Bonds Payable 100, ,000 (4,212) 95,788

3 Illustration 1 : Journal Entry to Pay Interest JE at 12/31/06 to pay interest: Calculations first: Cash paid=Face x stated rate x time = = 100,000 x.05 x 1 yr. = $5,000 Interest expense = CV x market rate x time = = 95,788 x.06 x 1 yr = $5,747 (rounded) Amortization of discount = difference (plug) = 5,747 – 5,000 = 747 (credit) Now journal entry: Interest Expense 5,747 Discount on B/P 747 Cash 5,000

4 Illustration 2 - Solution PV of interest annuity: PVA Table PVA Table PVA = A( ) = 3,500 (8.530) = $29,855 i, n i = 3%, n = 10 PV of face value: PV1 Table PV1 Table PV =FV1( ) = 100,000(0.744)=$74,400 i, n i=3%, n=10 Total issue price = $104,255 Issued at a premium of $4,255 because the company was offering an interest rate greater than the market rate, and investors were willing to pay more for the higher interest rate.

5 Illustration 2 - Journal Entries JE at 12/31/05 to pay interest: Note that the numbers for interest change each period because the carrying value changes, but the cash payment is the same each period. JE at 6/30/2010 to retire the bonds: Interest Expense 3,128 Premium on B/P 372 Cash 3,500 Bonds Payable 100,000 Cash100,000

6 Back to Illustration 2 – Bond Retirement Assume that Camaro’s bonds were retired on June 30, 2006 (after the interest payment). Camaro Corporation paid $103,000 to retire the bonds from the marketplace. Record the entries on June 30, JE at 6/30/06 to pay the interest (see Slide 12): JE at 6/30/06 to retire the bonds (CV = 103,500; see Slide 12): Interest Expense3,117 Premium on B/P 383 Cash 3,500 Bonds Payable 100,000 Premium on B/P3,500 Cash 103,000 Gain on Retirement500