School

Georgia State University **We aren't endorsed by this school

Course

ACCOUNTING 2110

Subject

Finance

Date

Nov 20, 2023

Type

Other

Pages

4

Uploaded by SuperHumanFlagDragonfly42 on coursehero.com

Chapter 14 Study Guide
Concepts related to bonds
Coupon rate (same as stated rate, contract rate, nominal rate): used to calculate
interest
payment
Effective rate (same as market rate and yield): used to calculate
PV, and
interest expense.
Face value (same as Principal)
Interest payment = principal*coupon rate, constant over time
Interest expense = prior period carrying value of bonds*effective rate
Bond issue at discount (coupon rate is lower than market)/ premium (coupon rate is
higher than market )
Amortization of bond discount / premium
Bond calculations
Bond issuance price =PV of face value+ PV of all coupon payments (OA)
With coupon rate, effective rate, bond carrying value, calculate:
1.
Interest payment for the interest period
2.
Interest expense for the interest period
3.
Amortization of bond discount / premium
4.
New bond carrying value
Contingent liabilities: only recognize when
it is probably (condition 1) and the
amount is
estimable (condition 2)

Sample Questions for Ch 14 Bond
1.
Calculate bond price
An investor purchases a
5-year, $1,000 par value bond that pays
semiannual interest of $50. If
the
semiannual
market rate
of interest is 6%, what is the current market value of the bond?
Solution:
Multiply interest payment by PV ordinary annuity of $1
Multiply face value by PV of a single amount $1
OA $50 × 7.36009*
=
$ 368
FV $1,000 × 0.55839** =
558
$ 926
*PVA of $1:
n
=
10;
i
=
6%
**PV of $1:
n
= 10;
i
= 6%
2.
Calculate interest expense
On
January 1, 2021, Legion Company sold $250,000 of 6% ten-year bonds. Interest is payable
semiannually on June 30 and December 31. The
bonds were sold for $163,976, priced to
yield
12%. Legion records interest at the effective rate. How much should Legion report
bond interest
expense for the six months ended June 30, 2021 (first payment)?
Solution:
Interest expense = Prior period bond carrying value * effective interest
First interest expense=bond price*effective interest=163,976*6%
June 30, 2021 is the first payment date, prior period bond carrying value=bond price=163,976
Effective interest = 12%/2=6% because interest is paid semiannually.
6.0% × $163,976 = $9,839

3.
Calculate bond liability balance
Auerbach Inc. issued
6% bonds on October 1, 2021. The bonds have a maturity date of
September 30, 2031 and a
face value of $500 million. The bonds pay interest each March 31 and
September 30, beginning March 31, 2022. The effective interest rate established by the market
was 8%. Assuming that Auerbach
issued the bonds for $432,050,000, what would the company
report for its net bond liability balance after its first interest payment on March 31, 2022?
Solution:
1.
Bond carrying value 10/1/2022=Bond price=
432,050,000
2.
Interest payment=face value*coupon rate=500,000,00*6%/2=15,000,000
3.
Interest expense=bond price*market rate=
432,050,000*8%/2=17,282,000
4.
Discount amortization=17,282,000-15,000,000=2,282,000
5.
Bond carrying value 3/31/2022=Bond carrying value
10/1/2022+2,282,000=
432,050,000+2,282,000=
434,332,000
Effective interest (semi-annual)=8%/2=4%
Stated rate (semi-annual)=6%/2=3%
Interest payment=face value*stated rate=500,000,000*3%=15,000,000
Date
Interest paid
Interest
expense
Discount
amortization
Bond carrying
value
10/1/2021
432,050,000
3/31/2022
15,000,000
17,282,000
2,282,000
434,332,000
Interest expense= Beginning liability of $432,050,000*effective interest rate 4%=17,282,000
Discount amortization=interest expense-interest paid=17,282,000-15,000,000
Liability balance = Beginning liability of $432,050,000 + Discount amortization =$434,332,000