Long-Term Liabilities Chapter 12 Exercises. Journalizing Bond Transactions In-Class Exercises (Form groups and work exercises): Exercise No. Page E12-22.

Long-Term Liabilities

Chapter 12

Exercises

Journalizing Bond TransactionsJournalizing Bond TransactionsJournalizing Bond TransactionsJournalizing Bond Transactions

In-Class Exercises (Form groups and work exercises):

Exercise No. Page E12-22 730 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)

Date Description Debit Credit

General Journal

ExerciseExercise PagePage E12-22E12-22 730 Journalizing Bond 730 Journalizing Bond Transactions Transactions

ExerciseExercise PagePage E12-22E12-22 730 Journalizing Bond 730 Journalizing Bond Transactions Transactions

Journalizing Bond TransactionsJournalizing Bond TransactionsJournalizing Bond TransactionsJournalizing Bond Transactions

Bond PricingBond PricingBond PricingBond Pricing

Exercise E12-22Exercise E12-22::

Clark issued Clark issued $50,000 of of 10-year, , 9% bonds payable on January 1, bonds payable on January 1, 2014. Clark pays interest each January 1 and July 1 and amortizes 2014. Clark pays interest each January 1 and July 1 and amortizes discount or premium by the discount or premium by the straight-line methodstraight-line method. The company can . The company can issue its bond payable under various conditions.issue its bond payable under various conditions.

RequirementsRequirements::

1.1. Journalize Clark’s issuance of the bonds and first semiannual Journalize Clark’s issuance of the bonds and first semiannual interest payment, assuming the bonds were issued at interest payment, assuming the bonds were issued at face value..

2.2. Journalize Clark’s issuance of the bonds and first semiannual Journalize Clark’s issuance of the bonds and first semiannual interest payment, assuming the bonds were issued atinterest payment, assuming the bonds were issued at 95..

3.3. Journalize Clark’s issuance of the bonds and first semiannual Journalize Clark’s issuance of the bonds and first semiannual interest payment, assuming the bonds were issued at interest payment, assuming the bonds were issued at 106..

Exercise E12-22Exercise E12-22::

Clark issued Clark issued $50,000 of of 10-year, , 9% bonds payable on January 1, bonds payable on January 1, 2014. Clark pays interest each January 1 and July 1 and amortizes 2014. Clark pays interest each January 1 and July 1 and amortizes discount or premium by the discount or premium by the straight-line methodstraight-line method. The company can . The company can issue its bond payable under various conditions.issue its bond payable under various conditions.

RequirementsRequirements::

1.1. Journalize Clark’s issuance of the bonds and first semiannual Journalize Clark’s issuance of the bonds and first semiannual interest payment, assuming the bonds were issued at interest payment, assuming the bonds were issued at face value..

2.2. Journalize Clark’s issuance of the bonds and first semiannual Journalize Clark’s issuance of the bonds and first semiannual interest payment, assuming the bonds were issued atinterest payment, assuming the bonds were issued at 95..

3.3. Journalize Clark’s issuance of the bonds and first semiannual Journalize Clark’s issuance of the bonds and first semiannual interest payment, assuming the bonds were issued at interest payment, assuming the bonds were issued at 106..

Journalizing Bond TransactionsJournalizing Bond TransactionsJournalizing Bond TransactionsJournalizing Bond Transactions

$50,000 x .09 x 6/12 = $2,250$50,000 x .09 x 6/12 = $2,250$50,000 x .09 x 6/12 = $2,250$50,000 x .09 x 6/12 = $2,250

Bonds issued at face valueBonds issued at face valueBonds issued at face valueBonds issued at face value

Journalizing Bond TransactionsJournalizing Bond TransactionsJournalizing Bond TransactionsJournalizing Bond Transactions

$50,000 x .95 = $47,500$50,000 x .95 = $47,500$50,000 x .95 = $47,500$50,000 x .95 = $47,500

Bonds issued at .95Bonds issued at .95Bonds issued at .95Bonds issued at .95

Journalizing Bond TransactionsJournalizing Bond TransactionsJournalizing Bond TransactionsJournalizing Bond Transactions

$50,000 - $47,500 = $2,500$50,000 - $47,500 = $2,500$50,000 - $47,500 = $2,500$50,000 - $47,500 = $2,500

Bonds issued at .95Bonds issued at .95Bonds issued at .95Bonds issued at .95

Journalizing Bond TransactionsJournalizing Bond TransactionsJournalizing Bond TransactionsJournalizing Bond Transactions

$2,500 ÷ $2,500 ÷ 20 = $12520 = $125$2,500 ÷ $2,500 ÷ 20 = $12520 = $125

?

Bonds issued at .95Bonds issued at .95Bonds issued at .95Bonds issued at .95

Journalizing Bond TransactionsJournalizing Bond TransactionsJournalizing Bond TransactionsJournalizing Bond Transactions

$2,250 + $125 = $2,375$2,250 + $125 = $2,375$2,250 + $125 = $2,375$2,250 + $125 = $2,375

Bonds issued at .95Bonds issued at .95Bonds issued at .95Bonds issued at .95

Journalizing Bond TransactionsJournalizing Bond TransactionsJournalizing Bond TransactionsJournalizing Bond Transactions

$50,000 x 1.06 = $53,000$50,000 x 1.06 = $53,000$50,000 x 1.06 = $53,000$50,000 x 1.06 = $53,000

Bonds issued at 1.06Bonds issued at 1.06Bonds issued at 1.06Bonds issued at 1.06

Journalizing Bond TransactionsJournalizing Bond TransactionsJournalizing Bond TransactionsJournalizing Bond Transactions

$53,000 - $50,000 = $3,000$53,000 - $50,000 = $3,000$53,000 - $50,000 = $3,000$53,000 - $50,000 = $3,000

Bonds issued at 1.06Bonds issued at 1.06Bonds issued at 1.06Bonds issued at 1.06

Journalizing Bond TransactionsJournalizing Bond TransactionsJournalizing Bond TransactionsJournalizing Bond Transactions

$3,000 ÷ $3,000 ÷ 20 = $15020 = $150$3,000 ÷ $3,000 ÷ 20 = $15020 = $150

Bonds issued at 1.06Bonds issued at 1.06Bonds issued at 1.06Bonds issued at 1.06

?

Journalizing Bond TransactionsJournalizing Bond TransactionsJournalizing Bond TransactionsJournalizing Bond Transactions

$2,250 - $150 = $2,100$2,250 - $150 = $2,100$2,250 - $150 = $2,100$2,250 - $150 = $2,100

Bonds issued at 1.06Bonds issued at 1.06Bonds issued at 1.06Bonds issued at 1.06

Journalizing Bond TransactionsJournalizing Bond TransactionsJournalizing Bond TransactionsJournalizing Bond Transactions

End of ExerciseEnd of Exercise

Journalizing Bond TransactionsJournalizing Bond TransactionsJournalizing Bond TransactionsJournalizing Bond Transactions

In-Class Exercises (Form groups and work exercises):

Exercise No. Page E12-28 731 Present Value of Bonds

Payable

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 ValuePricing Bonds Using Present ValuePricing Bonds Using Present ValuePricing Bonds Using Present Value

Prepare this schedule for each of the three stated requirements.Prepare this schedule for each of the three stated requirements.Prepare this schedule for each of the three stated requirements.Prepare this schedule for each of the three stated requirements.

Pricing Bonds Using Present ValuePricing Bonds Using Present ValuePricing Bonds Using Present ValuePricing Bonds Using Present Value

Exercise E12-28Exercise E12-28::

Interest rates determine the present value selling price of bonds. Interest rates determine the present value selling price of bonds. (Round all numbers to the nearest whole dollar)(Round all numbers to the nearest whole dollar)

RequirementsRequirements::

1.1. Determine the present vale of Determine the present vale of 7-year bonds payable, with a face bonds payable, with a face value of value of $91,000, and stated (contract) interest rate of , and stated (contract) interest rate of 14%. The . The market rate is market rate is 14%14% at issuance. at issuance.

2.2. Same bonds payable as in Requirement 1, but the market interest Same bonds payable as in Requirement 1, but the market interest rate is rate is 16%.

3.3. Same bonds payable as in Requirement 1, but the market interest Same bonds payable as in Requirement 1, but the market interest rate is rate is 12%.

4. Note: First, determine the periodic interest payment, using the contract rate of interest.

Exercise E12-28Exercise E12-28::

Interest rates determine the present value selling price of bonds. Interest rates determine the present value selling price of bonds. (Round all numbers to the nearest whole dollar)(Round all numbers to the nearest whole dollar)

RequirementsRequirements::

1.1. Determine the present vale of Determine the present vale of 7-year bonds payable, with a face bonds payable, with a face value of value of $91,000, and stated (contract) interest rate of , and stated (contract) interest rate of 14%. The . The market rate is market rate is 14%14% at issuance. at issuance.

2.2. Same bonds payable as in Requirement 1, but the market interest Same bonds payable as in Requirement 1, but the market interest rate is rate is 16%.

3.3. Same bonds payable as in Requirement 1, but the market interest Same bonds payable as in Requirement 1, but the market interest rate is rate is 12%.

4. Note: First, determine the periodic interest payment, using the contract rate of interest.

Pricing Bonds Using Present ValuePricing Bonds Using Present ValuePricing Bonds Using Present ValuePricing 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 ValuePricing Bonds Using Present ValuePricing Bonds Using Present ValuePricing Bonds Using Present Value

Pricing Bonds Using Present ValuePricing Bonds Using Present ValuePricing Bonds Using Present ValuePricing Bonds Using Present Value

Pricing Bonds Using Present ValuePricing Bonds Using Present ValuePricing Bonds Using Present ValuePricing Bonds Using Present Value

Pricing Bonds Using Present ValuePricing Bonds Using Present ValuePricing Bonds Using Present ValuePricing Bonds Using Present Value

End of ExerciseEnd of Exercise

In-Class Exercise (Form groups and work exercise):

Exercise No. Page E12B-29 732 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 MethodEffective Interest Amortization MethodEffective Interest Amortization MethodEffective Interest Amortization Method

Exercise E12B-29Exercise E12B-29::

Use your answers from Requirements 1-3 of Exercise E12A-28.Use your answers from Requirements 1-3 of Exercise E12A-28.

Journalize issuance of the bond and the first semiannual interest Journalize issuance of the bond and the first semiannual interest payment under each of the three assumptions in Exercise E12A-28.payment under each of the three assumptions in Exercise E12A-28.

The company amortizes bond premium and discount by the The company amortizes bond premium and discount by the effective-interest amortization method.effective-interest amortization method.

Exercise E12B-29Exercise E12B-29::

Use your answers from Requirements 1-3 of Exercise E12A-28.Use your answers from Requirements 1-3 of Exercise E12A-28.

Journalize issuance of the bond and the first semiannual interest Journalize issuance of the bond and the first semiannual interest payment under each of the three assumptions in Exercise E12A-28.payment under each of the three assumptions in Exercise E12A-28.

The company amortizes bond premium and discount by the The company amortizes bond premium and discount by the effective-interest amortization method.effective-interest amortization method.

Effective Interest Amortization MethodEffective Interest Amortization MethodEffective Interest Amortization MethodEffective Interest Amortization Method

Effective Interest Amortization MethodEffective Interest Amortization MethodEffective Interest Amortization MethodEffective Interest Amortization Method

Market Rate = 14%Market Rate = 14%Market Rate = 14%Market Rate = 14%

Effective Interest Amortization MethodEffective Interest Amortization MethodEffective Interest Amortization MethodEffective Interest Amortization Method

$91,000 - $83,454 = $7,546$91,000 - $83,454 = $7,546$91,000 - $83,454 = $7,546$91,000 - $83,454 = $7,546

Market Rate = 16%Market Rate = 16%Market Rate = 16%Market Rate = 16%

Effective Interest Amortization MethodEffective Interest Amortization MethodEffective Interest Amortization MethodEffective Interest Amortization Method

$83,454 x .08 = $6,676$83,454 x .08 = $6,676$83,454 x .08 = $6,676$83,454 x .08 = $6,676

Market Rate = 16%Market Rate = 16%Market Rate = 16%Market Rate = 16%

Effective Interest Amortization MethodEffective Interest Amortization MethodEffective Interest Amortization MethodEffective Interest Amortization Method

$6,676 - $6,370 = $306$6,676 - $6,370 = $306$6,676 - $6,370 = $306$6,676 - $6,370 = $306

Market Rate = 16%Market Rate = 16%Market Rate = 16%Market Rate = 16%

Effective Interest Amortization MethodEffective Interest Amortization MethodEffective Interest Amortization MethodEffective Interest Amortization Method

$99,431 - $91,000 = $8,431$99,431 - $91,000 = $8,431$99,431 - $91,000 = $8,431$99,431 - $91,000 = $8,431

Market Rate = 12%Market Rate = 12%Market Rate = 12%Market Rate = 12%

Effective Interest Amortization MethodEffective Interest Amortization MethodEffective Interest Amortization MethodEffective Interest Amortization Method

$99,431 x .06 = $5,966$99,431 x .06 = $5,966$99,431 x .06 = $5,966$99,431 x .06 = $5,966

Market Rate = 12%Market Rate = 12%Market Rate = 12%Market Rate = 12%

Effective Interest Amortization MethodEffective Interest Amortization MethodEffective Interest Amortization MethodEffective Interest Amortization Method

$6,370 - $5,966 = $404$6,370 - $5,966 = $404$6,370 - $5,966 = $404$6,370 - $5,966 = $404

Market Rate = 12%Market Rate = 12%Market Rate = 12%Market Rate = 12%

End of ExerciseEnd of Exercise

Effective Interest Amortization MethodEffective Interest Amortization MethodEffective Interest Amortization MethodEffective Interest Amortization Method