1. Long-Term Liabilities
Chapter 12
Exercises

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

3. Journalizing Bond Transactions
General Journal
Date Description Debit Credit
Exercise Page
E Journalizing Bond Transactions

4. Bond Pricing Exercise E12-22:
Clark issued $50,000 of 10-year, 9% bonds payable on January 1, 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.

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

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

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

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

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

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

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

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

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

14. Journalizing Bond Transactions
End of Exercise

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

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

17. 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.

18. 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 = $12,740 / 2 = $6,370

19. Pricing Bonds Using Present Value

20. Pricing Bonds Using Present Value

21. Pricing Bonds Using Present Value

22. Pricing Bonds Using Present Value
End of Exercise

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

24. 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.

25. Effective Interest Amortization Method
Market Rate = 14%

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

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

28. Effective Interest Amortization Method
Market Rate = 16%
$6, $6,370 = $306

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

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

31. Effective Interest Amortization Method
Market Rate = 12%
$6, $5,966 = $404

32. Effective Interest Amortization Method
End of Exercise