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Transcript of Copyright © 2001 by M. Ray Gregg. All rights reserved. 1 focus.
Copyright © 2001 by M. Ray Gregg. All rights reserved.1
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Speakers:Speakers:•TelephonyTelephony – Charles MCNamara, – Charles MCNamara,
Cox Comm. Cox Comm.
•PortalsPortals – Rob Sellers – Rob Sellers ee-Partners-Partners
•Web TechnologyWeb Technology – Jeff Barnes – Jeff Barnes Scizzortell Scizzortell
Students - $25.00 Registration FeeStudents - $25.00 Registration FeePlease see Mrs. Baker (GC3F07, x6669) Please see Mrs. Baker (GC3F07, x6669) for more information.for more information.
Earn PDP and Business Seminar PointsEarn PDP and Business Seminar PointsCPE credit availableCPE credit available
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Systems Analyst InternshipSystems Analyst Internship Williams Company Williams Company
This is a prestigious internship for Junior This is a prestigious internship for Junior MISMIS majorsmajors
Must be familiar with MS Office ProductsMust be familiar with MS Office Products Work well in a team environmentWork well in a team environment Excellent oral and written communication skillsExcellent oral and written communication skills Sign up for an interview in the College & Career Sign up for an interview in the College & Career
Guidance Center Guidance Center no later than 9:00am on Feb. 16no later than 9:00am on Feb. 16thth
Interviews on Feb. 24Interviews on Feb. 24thth Call x6912 if you have any questions.Call x6912 if you have any questions.
Little Co.
Big Corp.
Copyright © 2001 by M. Ray Gregg. All rights reserved.5
? ? ?
Copyright © 2001 by M. Ray Gregg. All rights reserved.6
A = L + C
Copyright © 2001 by M. Ray Gregg. All rights reserved.7
A = L + C
This Week’sLesson
Long-Term Liabilities
Copyright © 2001 by M. Ray Gregg. All rights reserved.9
Long-Term LiabilitiesObjectivesObjectives
Determine and record the selling price of the bond
Determine and record amortization of premium and discount
using straight-line method interest 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
stated, contract, or coupon rate (specified)
effective 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
unattractivemarket > 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
unattractivemarket > 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 = discountmarket > 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
MarketRate
SellingPriceContract
Rate
Face
Copyright © 2001 by M. Ray Gregg. All rights reserved.33
Issuing Bonds at Face
MarketRate
SellingPriceContract
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 Pay diff Bonds Payable face
Copyright © 2001 by M. Ray Gregg. All rights reserved.37
Issuing Bonds at Less Than Face
MarketRate
SellingPrice
Contract
Rate
Face
Copyright © 2001 by M. Ray Gregg. All rights reserved.38
Issuing Bonds at Less Than Face
MarketRate
SellingPrice
Contract
Rate
Face
Cash rec’dDiscount on Bonds Pay diff Bonds Payable face
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
DeterminingSelling 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
ExerciseBound 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, 2002.
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 $260,000 @ 10% semiannually:
$260,000
Copyright © 2001 by M. Ray Gregg. All rights reserved.53
PV of $260,000 @ 10% semiannually:
$260,000 x present value “tables” in the text
Copyright © 2001 by M. Ray Gregg. All rights reserved.54
PV of $260,000 @ 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
MarketRate
SellingPriceContract
Rate
Face
Copyright © 2001 by M. Ray Gregg. All rights reserved.56
PV of $260,000 @ 10% semiannually:
$260,000 x .37689
Copyright © 2001 by M. Ray Gregg. All rights reserved.57
PV of $260,000 @ 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 $260,000 @ 10% semiannually:
$260,000 x .37689 = $ 97,991.40
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 $260,000 @ 10% semiannually:
$260,000 x .37689 = $ 97,991.40
PV of Interest
$11,700
Copyright © 2001 by M. Ray Gregg. All rights reserved.63
PV of $260,000 @ 10% semiannually:
$260,000 x .37689 = $ 97,991.40
PV of Interest
$11,700 x 12.46221
Copyright © 2001 by M. Ray Gregg. All rights reserved.64
PV of $260,000 @ 10% semiannually:
$260,000 x .37689 = $ 97,991.40
PV of Interest
$11,700 x 12.46221 = 145,807.85
Copyright © 2001 by M. Ray Gregg. All rights reserved.65
PV of $260,000 @ 10% semiannually:
$260,000 x .37689 = $ 97,991.40
PV of Interest
$11,700 x 12.46221 = 145,807.85
Copyright © 2001 by M. Ray Gregg. All rights reserved.66
PV of $260,000 @ 10% semiannually:
$260,000 x .37689 = $ 97,991.40
PV of Interest
$11,700 x 12.46221 = 145,807.85
Proceeds from the Sale of Bonds = $243,799.25
Copyright © 2001 by M. Ray Gregg. All rights reserved.67
ExerciseBound 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, 2002.
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 $260,000 @ 10% semiannually:
$260,000 x .37689 = $ 97,991.40
PV of Interest
$11,700 x 12.46221 = 145,807.85
Proceeds from the Sale of Bonds = $243,799.25
(a) The journal entry to record the sale of the bonds:
Cash 243,799
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 Payable amt
Interest Expense amt
Amortization of Discount
Interest Expense amt
Discount on Bonds Payable amt
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. 701 - 704 at end of chapter)
Interest PAID
(face x contract)
Interest INCURRED
(BCA x market)
Amount ofAmortization
Copyright © 2001 by M. Ray Gregg. All rights reserved.78
ExerciseBound 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
Cash 11,700
Copyright © 2001 by M. Ray Gregg. All rights reserved.81
ExerciseBound 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
Cash 11,700
(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. 701 - 704 at end of chapter)
Interest PAID
(face x contract)
Interest INCURRED
(BCA x market)
Amount ofAmortization
Copyright © 2001 by M. Ray Gregg. All rights reserved.85
Copyright © 2001 by M. Ray Gregg. All rights reserved.86
Pmt
A
Interest Paid (4.5% x
$260,000)
B Interest Expense (5% x E)
C Discount
Amortization (B - A)
D Unamortized
Discount (D - C)
E B. C. A.
($260,000 - D) (E + C)
16201 243799
1
244289
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 $260,000 @ 10% semiannually:
$260,000 x .37689 = $ 97,991.40
PV of Interest
$11,700 x 12.46221 = 145,807.85
Proceeds from the Sale of Bonds = $243,799.25
(a) The journal entry to record the sale of the bonds:
Cash 243,799
Discount on Bonds Payable 16,201
Bonds Payable 260,000
Copyright © 2001 by M. Ray Gregg. All rights reserved.88
Pmt
A
Interest Paid (4.5% x
$260,000)
B Interest Expense (5% x E)
C Discount
Amortization (B - A)
D Unamortized
Discount (D - C)
E B. C. A.
($260,000 - D) (E + C)
16201 243799
1
244289
Determine Amount of Amortization(refer to example “charts” on pages 702 and 704)
Copyright © 2001 by M. Ray Gregg. All rights reserved.89
Pmt
A Interest Paid
(4.5% x$260,000)
B InterestExpense(5% x E)
C Discount
Amortization(B - A)
D Unamortized
Discount(D - C)
E B. C. A.
($260,000 - D)(E + C)
16201 2437991 11700 12190 490 15711 244289
Determine Amount of Amortization(refer to example “charts” on pages 702 and 704)
Copyright © 2001 by M. Ray Gregg. All rights reserved.90
Pmt
A Interest Paid
(4.5% x$260,000)
B InterestExpense(5% x E)
C Discount
Amortization(B - A)
D Unamortized
Discount(D - C)
E B. C. A.
($260,000 - D)(E + C)
16201 2437991 11700 12190 490 15711 244289
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
Cash 11,700
(b) (2)
Bond Interest Expense 490
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
Cash 11,700
Copyright © 2001 by M. Ray Gregg. All rights reserved.93
ExerciseBound 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 Pay 11,700
Copyright © 2001 by M. Ray Gregg. All rights reserved.95
Amortization of Discount
(c) (1)
Bond Interest Expense 11,700
Bond Interest Pay 11,700
(c) (2)
Bond Interest Expense ???
Discount on Bonds Pay ???
Copyright © 2001 by M. Ray Gregg. All rights reserved.96
Pmt
A Interest Paid
(4.5% x$260,000)
B InterestExpense(5% x E)
C Discount
Amortization(B - A)
D Unamortized
Discount(D - C)
E B. C. A.
($260,000 - D)(E + C)
16201 2437991 11700 12190 490 15711 244289
Determine Amount of Amortization(refer to example “charts” on pages 665 and 666)
Copyright © 2001 by M. Ray Gregg. All rights reserved.97
Pmt
A Interest Paid
(4.5% x$260,000)
B InterestExpense(5% x E)
C Discount
Amortization(B - A)
D Unamortized
Discount(D - C)
E B. C. A.
($260,000 - D)(E + C)
16201 2437991 11700 12190 490 15711 244289
Determine Amount of Amortization(refer to example “charts” on pages 665 and 666)
Copyright © 2001 by M. Ray Gregg. All rights reserved.98
Pmt
A Interest Paid
(4.5% x$260,000)
B InterestExpense(5% x E)
C Discount
Amortization(B - A)
D Unamortized
Discount(D - C)
E B. C. A.
($260,000 - D)(E + C)
16201 2437991 11700 12190 490 15711 2442892 11700 12214 514 15197 244803
Determine Amount of Amortization(refer to example “charts” on pages 665 and 666)
Copyright © 2001 by M. Ray Gregg. All rights reserved.99
Pmt
A Interest Paid
(4.5% x$260,000)
B InterestExpense(5% x E)
C Discount
Amortization(B - A)
D Unamortized
Discount(D - C)
E B. C. A.
($260,000 - D)(E + C)
16201 2437991 11700 12190 490 15711 2442892 11700 12214 514 15197 244803
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 Pay 11,700
(c) (2)
Bond Interest Expense 514
Discount on Bonds Pay 514
Copyright © 2001 by M. Ray Gregg. All rights reserved.101
Payment on January 1
Bond Interest Payable 11,700
Cash 11,700
Copyright © 2001 by M. Ray Gregg. All rights reserved.102
Pmt
A
Interest Paid (4.5% x
$260,000)
B Interest Expense (5% x E)
C Discount
Amortization (B - A)
D Unamortized
Discount (D - C)
E B. C. A.
($260,000 - D) (E + C)
16201 243799
1 11700 12190 490 15711 244289
2 11700 12214 514 15197 244803
3 11700 12240 540 14657 245343
4 11700 12267 567 14090 245910
5 11700 12296 596 13494 246506
Determine Amount of Amortization(refer to example “charts” on pages 665 and 666)