WORKING PAPERS F/ FUND ACCOUNTING
WORKING PAPERS F/ FUND ACCOUNTING
22nd Edition
ISBN: 9781308868394
Author: Wild
Publisher: MCG CUSTOM
Question
Book Icon
Chapter 14, Problem 6BTN
To determine

Issue of bond at premium:

When the coupon rate or contract rate of a bond is higher than the market interest rate, the bond is being issued at premium. If the bond is issued at premium, the selling price of the bond will be higher than the face value of the bond.

Effective interest method:

Effective interest method aims at computing an accurate interest expense. In case of issue of bonds on premium, the carrying value of the bonds payable inclusive of premium amortized is used to determine the interest expense during a particular period. Hence the interest expense decreases as the carrying value of the bonds decrease.

To determine:

1. Preparation of format of amortization table for bond premium using effective interest method.

2 Allocating the amounts in their respective columns

3. Determine the final number in each column.

4. Computation of total bond interest expense over the life of the bonds.

5. Prepare similarities and differences between the amortization table for premium and discount.

Expert Solution & Answer
Check Mark

Answer to Problem 6BTN

Solution:

1.

    Period Ending
    Cash Interest Paid
    Bond Interest Expense
    Premium
    Amortization
    Unamortized
    Premium
    Carrying Value
















































2.

    Period Ending
    (A)
    Cash Interest Paid
    4.5% X Par Value
    (B)
    Bond Interest Expense
    4% X Prior (E)
    (C)
    Premium
    Amortization
    (A) − (B)
    (D)
    Unamortized
    Premium
    Prior (D) − (C)
    (E)
    Carrying Value
    Par Value + (D)
    01/1/2015



    $4,100
    $104,100
    06/30/2015
    $4,500
    $4,164
    $336
    $3,764
    $103,764
    12/31/2015
    $4,500
    $4,151
    $349
    $3,415
    $103,415
    06/30/2016
    $4,500
    $4,137
    $363
    $3,052
    $103,052
    12/31/2016
    $4,500
    $4,122
    $378
    $2,674
    $102,674
    06/30/2017
    $4,500
    $4,107
    $393
    $2,281
    $102,281
    12/31/2017
    $4,500
    $4,091
    $409
    $1,872
    $101,872
    06/30/2018
    $4,500
    $4,075
    $425
    $1,447
    $101,447
    12/31/2018
    $4,500
    $4,058
    $442
    $1,005
    $101,005
    06/30/2019
    $4,500
    $4,040
    $460
    $545
    $100,545






3. Final numbers of each column

    12/31/2019
    $4,500
    $3,955
    $545
    0
    $100,000

    $45,000
    $40,900
    $4,100


4. The total interest expense over the life of the bonds is $40,900.

5.

    SimilaritiesIssue of bonds on premium
    Issue of bonds on discount
    Cash Interest
    Payment
    Constant over the bonds’ life
    Constant over the bonds’ life
    Unamortized Discount / Premium
    Diminishing periodically till maturity
    Diminishing periodically till maturity



    Differences

    Bond Interest
    Expense
    Decreases periodically over the life of the bonds.
    Increases periodically over the life of the bonds.
    Discount /Premium Amortization
    Premium amortization per period is computed by deducting the interest expense from the cash interest payment.
    Discount amortization per period is computed by deducting the cash interest payment from the interest expense.
    Carrying Value
    The carrying value decreases periodically till it becomes equal to par value at the maturity.
    (Par Value + Unamortized Premium)
    The carrying value increases periodically till it becomes equal to par value at the maturity.
    (Par Value - Unamortized Discount)

Explanation of Solution

Explanation:

2.
  Premium on Bonds Payable = Issue price of the bondPar value of the bond                                                 = $104,100*  $100,000                                                 = $4,100 *Issue Price = $100,000 X 1.041 = $104,100

Same steps are followed through all the period till the maturity of the bonds.

4.

    Computation of total interest expense
    Amount to be repaid at maturity:

    Total Interest Payment
    $45,000
    Par Value of Bonds
    $100,000
    Total amount to be repaid
    $145,000
    Less : Selling Price of the Bonds
    $104,100


    Total Bond Interest Expense
    $40,900


  *Interest Payment = $4,500 X 10 = $45,000* Semiannual Interest Payment = $100,000 X 0.045 = $4,500

Conclusion

Conclusion:

Thus, from the above we can clearly understand the differences and the similarities between the amortization table for premium and discount.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Chapter 14 Solutions

WORKING PAPERS F/ FUND ACCOUNTING

Ch. 14 - Prob. 11DQCh. 14 - Prob. 12DQCh. 14 - Prob. 13DQCh. 14 - Prob. 14DQCh. 14 - Prob. 15DQCh. 14 - Prob. 16DQCh. 14 - Prob. 17DQCh. 14 - Prob. 18DQCh. 14 - Prob. 19DQCh. 14 - Prob. 20DQCh. 14 - Prob. 1QSCh. 14 - Prob. 2QSCh. 14 - Prob. 3QSCh. 14 - Prob. 4QSCh. 14 - Prob. 5QSCh. 14 - Prob. 6QSCh. 14 - Prob. 7QSCh. 14 - Prob. 8QSCh. 14 - Prob. 9QSCh. 14 - Prob. 10QSCh. 14 - Prob. 11QSCh. 14 - Prob. 12QSCh. 14 - Prob. 13QSCh. 14 - Prob. 14QSCh. 14 - Prob. 15QSCh. 14 - Prob. 16QSCh. 14 - Prob. 17QSCh. 14 - Prob. 18QSCh. 14 - Prob. 19QSCh. 14 - Prob. 20QSCh. 14 - Prob. 1ECh. 14 - Prob. 2ECh. 14 - Prob. 3ECh. 14 - Prob. 4ECh. 14 - Prob. 5ECh. 14 - Prob. 6ECh. 14 - Exercise 14*7 Straight-Line: Amortization of bond...Ch. 14 - Prob. 8ECh. 14 - Prob. 9ECh. 14 - Prob. 10ECh. 14 - Prob. 11ECh. 14 - Prob. 12ECh. 14 - Prob. 13ECh. 14 - Prob. 14ECh. 14 - Prob. 15ECh. 14 - Prob. 16ECh. 14 - Prob. 17ECh. 14 - Prob. 18ECh. 14 - Prob. 19ECh. 14 - Prob. 20ECh. 14 - Prob. 1APSACh. 14 - Prob. 2APSACh. 14 - Prob. 3APSACh. 14 - Prob. 4APSACh. 14 - Prob. 5APSACh. 14 - Prob. 6APSACh. 14 - Prob. 7APSACh. 14 - Prob. 8APSACh. 14 - Prob. 9APSACh. 14 - Prob. 10APSACh. 14 - Prob. 11APSACh. 14 - Prob. 1BPSBCh. 14 - Prob. 2BPSBCh. 14 - Prob. 3BPSBCh. 14 - Prob. 4BPSBCh. 14 - Prob. 5BPSBCh. 14 - Prob. 6BPSBCh. 14 - Prob. 7BPSBCh. 14 - Prob. 8BPSBCh. 14 - Prob. 9BPSBCh. 14 - Prob. 10BPSBCh. 14 - Problem 14-11EC Capital lease accounting C3 Braun...Ch. 14 - Prob. 14SPCh. 14 - Prob. 1BTNCh. 14 - Prob. 2BTNCh. 14 - Prob. 3BTNCh. 14 - Prob. 4BTNCh. 14 - Prob. 5BTNCh. 14 - Prob. 6BTNCh. 14 - Prob. 7BTNCh. 14 - Prob. 8BTNCh. 14 - Samsung (w ww.Sanisung.com). Apple, and Google are...
Knowledge Booster
Background pattern image
Recommended textbooks for you
Text book image
FINANCIAL ACCOUNTING
Accounting
ISBN:9781259964947
Author:Libby
Publisher:MCG
Text book image
Accounting
Accounting
ISBN:9781337272094
Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:Cengage Learning,
Text book image
Accounting Information Systems
Accounting
ISBN:9781337619202
Author:Hall, James A.
Publisher:Cengage Learning,
Text book image
Horngren's Cost Accounting: A Managerial Emphasis...
Accounting
ISBN:9780134475585
Author:Srikant M. Datar, Madhav V. Rajan
Publisher:PEARSON
Text book image
Intermediate Accounting
Accounting
ISBN:9781259722660
Author:J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:McGraw-Hill Education
Text book image
Financial and Managerial Accounting
Accounting
ISBN:9781259726705
Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:McGraw-Hill Education