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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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ExerciseCompleting a Bond Amortization Table (Effective Interest Rate Method)

Cagney Company sold $200,000 of bonds on July 1, 2018. A portion of the amortization table appears below.

Period

Cash Payment (Credit)

Interest Expense (Debit)

Discount on Bonds Payable (Credit)

Discount on Bonds Payable Balance

Carrying

Value

12/31/19

$9,000

$9,277

$277

$2,340

S197,660

06/30/20

9.000

9,290

290

2,050

197,950

12/31/20

?

?

7

T

?

Required:

1. Indicate the stated interest rale on these bonds,

  1. Calculate the effective annual interest rate on these bonds. {Note: Round to the nearest 0.1%.)
  2. Determine the interest expense and discount amortization for the interest period ending December 31, 2020. (Note: Round to the nearest dollar.)
  3. Determine the liability balance after the interest payment is recorded on December 31,2020.

To determine

(a)

Introduction:

As per the effective interest rate method, a constant interest rate on book or carrying value is assigned to each period.

To calculate:

Stated rate of interest on bonds.

Explanation

Given:

$200,000 were issued on 1st July 2018 and portion of amortization table:

Annual Period Cash Payment (Credit) Interest Expense (Debit) Discount on Bonds Payable (Credit) Discount on Bonds Payable Balance Carrying Value
12/31/2019 9,000 9,277 277 2,340 197,660
06/30/2020 9,000 9,290 290 2,050 197,950
12/31/2020 ? ? ? ? ?

Cash Payment =

To determine

(b)

Introduction:

A Bond is long term liability wherein the issuer is entitled to pay the face value of the Bond at the time of maturity and make interest payments periodically. It is a breakdown of large debt to borrow as it may be too large for an individual lender.

To calculate:

The Effective annual interest rate on bonds.

To determine

(c)

Introduction:

A Bond is long term liability wherein the issuer is entitled to pay the face value of the Bond at the time of maturity and make interest payments periodically. It is a breakdown of large debt to borrow as it may be too large for an individual lender.

To calculate:

The interest expense and discount amortized for period ending on 31st Dec 2020.

To determine

(d)

Introduction:

A Bond is long term liability wherein the issuer is entitled to pay the face value of the Bond at the time of maturity and make interest payments periodically. It is a breakdown of large debt to borrow as it may be too large for an individual lender.

To show:

Bonds in the Balance Sheet for year ending on 31st December 2024.

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