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					Issuing Bonds Example
A firm issues 10% bonds with a face value of $1,000,000. Assumption No. 1: The market rate of
interest is 10% and the bonds are issued for $1,000,000. Assumption No. 2: The market rate of
interest is 11% and the bonds are issued for $950,000. Assumption No. 3: The market rate of
interest is 9% and the bonds are issued for $1,050,000. Make the entry to record the issuance of
the bonds under each of these assumptions.

 No. Account Title and Explanation           Debit        Credit
 Date Account Title and Explanation          Debit        Credit
x-x-xx Assumption No. 1
       Cash                                1,000,000
           Bonds payable                                1,000,000
       To record issuance of bonds.

       Assumption No. 2
x-x-xx Cash                                  950,000
       Discount on bonds payable              50,000
           Bonds payable                                1,000,000
       To record issuance of bonds.

x-x-xx Assumption No. 3
       Cash                                1,050,000
           Premium on bonds payable                        50,000
           Bonds payable                                1,000,000
       To record issuance of bonds.
Accounting for Bonds Example
A firm issues one hundred, 2-year bonds, face value of $1,000 each, on January 1, 2005 (the
bond date). The underwriter, after deducting its commission, remits the net proceeds of $96,619.90
to the issuer. The bonds pay interest annually on January 1. The coupon (stated) rate is 10%. All
bonds are purchased by one institutional investor. Make (1) straight-line & (2) effective entries for the
life of the bonds.

Collected by issuer on Jan. 1, 2001               96,619.90
Paid by issuer on Jan. 1, 2002                  (10,000.00)
Paid by issuer on Jan. 1, 2003                 (110,000.00)
Effective rate                                   12.00000%

  Date     Account Title and Explanation           Debit         Credit
                    Straight-line
   1/1/05 Cash                                   96,619.90
          Discount on bonds payable               3,380.10
              Bonds payable                                   100,000.00

12/31/05 Interest expense                        11,690.05
              Discount on bonds payable                          1,690.05
              Interest payable                                  10,000.00

   1/1/06 Interest payable                       10,000.00
               Cash                                             10,000.00

12/31/06 Interest expense                        11,690.05
              Discount on bonds payable                          1,690.05
              Interest payable                                  10,000.00

   1/1/07 Interest payable                       10,000.00
          Bonds payable                         100,000.00
               Cash                                           110,000.00

                       Effective
   1/1/05 Cash                                   96,619.90
          Discount on bonds payable               3,380.10                     Discount on Bonds Payable
              Bonds payable                                   100,000.00       Debit     Credit   Balance
                                                                             3,380.10             3,380.10
12/31/05 Interest expense                        11,594.39                              1,594.39 1,785.71
              Discount on bonds payable                          1,594.39               1,785.71     (0.00)
              Interest payable                                  10,000.00

   1/1/06 Interest payable                       10,000.00
               Cash                                             10,000.00

12/31/06 Interest expense                        11,785.71
              Discount on bonds payable                          1,785.71
              Interest payable                                  10,000.00

   1/1/07 Interest payable                       10,000.00
          Bonds payable                         100,000.00
Cash   110,000.00
Bonds issued after bond date
Assume all the assumptions in the previous example are the same, except that the bonds are not
issued on the bond date, but instead are issued on 6-30-05.

   Date          Account Title and Explanation             Debit         Credit
 6/30/2005 Cash                                          102,417.09
           Discount on bonds payable                       3,380.10
               Bonds payable                                          100,000.00
               Interest payable                                         5,797.19

12/31/2005 Interest expense                                5,797.19
                Discount on bonds payable                                1,594.39
                Interest payable                                         4,202.81

  1/1/2006 Interest payable                               10,000.00
                Cash                                                    10,000.00

12/31/2006 Interest expense                               11,785.71
                Interest payable                                        10,000.00
                Discount on bonds payable                                1,785.71

  1/1/2007 Interest payable                               10,000.00
           Bonds payable                                 100,000.00
                Cash                                                  110,000.00
Debt Issue Costs
The Dartmouth Corporation issued 3-year, 8% bonds with a face value of $200,000, receiving net
proceeds from the underwriter of $205,328.55 (7% annual yield). Dartmouth incurred printing, legal,
and clerical costs of $6,000. Dartmouth's accountant prepared the amortization schedule shown below:

                             AMORTIZATION TABLE: APB No. 21 Approach
                                                    Interest                     Premium          Bonds
 Date                                              Expense        Cash           Balance         Balance
  1/1/05                                                                           5,328.55      200,000.00
 6/30/05                                          7,186.50         8,000.00        4,515.05      200,000.00
  1/1/06                                          7,158.03         8,000.00        3,673.08      200,000.00
 6/30/06                                          7,128.56         8,000.00        2,801.64      200,000.00
  1/1/07                                          7,098.06         8,000.00        1,899.69      200,000.00
 6/30/07                                          7,066.49         8,000.00          966.18      200,000.00
  1/1/08                                          7,033.82         8,000.00           (0.00)     200,000.00

REQUIRED:
1. Make the 1/1/05 and 6/30/05 entries assuming that Dartmouth accounts for debt issue costs in
   accordance with APB No. 21.
2. Make the 1/1/05 and 6/30/05 entries assuming that Dartmouth accounts for debt issue costs in
  accordance with SFAC No. 6, para. 237.

  Date             Account Title and Explanation                  Debit           Credit
                           APB No. 21
   1/1/05 Cash                                                  205,328.55
             Premium on bonds payable                                              5,328.55
             Bonds payable                                                       200,000.00

   1/1/05 Deferred Bond Issue Costs                                6,000.00
             Cash                                                                  6,000.00

 6/30/05 Interest expense                                          7,186.50
         Premium on bonds payable                                    813.50
             Cash                                                                  8,000.00

 6/30/05 Bond issue expenses                                       1,000.00
            Deferred bond issue costs                                              1,000.00

                             AMORTIZATION TABLE: SFAC No. 6 Approach
                                                    Interest                     Discount         Bonds
 Date                                              Expense        Cash           Balance         Balance
  1/1/05                                                                             671.45      200,000.00
 6/30/05                                          8,101.07         8,000.00          570.38      200,000.00
  1/1/06                                          8,105.17         8,000.00          465.21      200,000.00
 6/30/06                                          8,109.45         8,000.00          355.76      200,000.00
  1/1/07                                          8,113.90         8,000.00          241.87      200,000.00
 6/30/07                                          8,118.52         8,000.00          123.34      200,000.00
  1/1/08                                          8,123.34         8,000.00           (0.00)     200,000.00

Find the internal rate of return when the net proceeds are $205,328.55 - $6,000 or -------->   $ 199,328.55
                                                                          199,328.55
                                                                           (8,000.00)
                                                                           (8,000.00)
                                                                           (8,000.00)
                                                                           (8,000.00)
                                                                           (8,000.00)
                                                                         (208,000.00)
                                                                  IRR=      4.06418%
Date           Account Title and Explanation    Debit        Credit
                       APB No. 21
 1/1/05 Cash                                   205,328.55
           Discount on bonds payable                          5,328.55
           Bonds payable                                    200,000.00

 1/1/05 Discount on bonds payable                6,000.00
           Cash                                               6,000.00

6/30/05 Interest expense                         8,101.07
            Discount on bonds payable                           101.07
            Cash                                              8,000.00
Early Extinguishment of debt example
After adjusting all balances at the extinguishment date, a firm has balances in bonds payable of
$1,000,000, premium on bonds payable of $50,000, interest payable of $24,000, and deferred bond
issue costs of $20,000. It retires 30% of these bonds in an open market purchase for $297,000 plus
accrued interest.

  Date            Account Title and Explanation             Debit       Credit
 x-xx-xx   Bonds payable                                    300,000
           Premium on bonds payable                          15,000
           Interest payable                                   7,200
               Deferred bonds issue costs                                 6,000
               Cash                                                     304,200
               Gain on early extinguishment of debt                      12,000
NOTES ISSUED AT FACE VALUE
On 1-1-04, ABC, Inc., borrows $10,000 signing the 2-year, 10% note shown below:

                      Interest-bearing Promissory Note
          January 1, 2004
          On or before 12-31-05, ABC, Inc., promises to pay First
          National Bank $10,000. Interest of 10% per annum is to be
          paid annually at December 31.
                                                           John Smith       .
                                                         President, ABC, Inc.

REQUIRED: Make ABC's entries for the life of the note.

  Date                   Account Title and Explanation                          Debit    Credit
 1/1/2004 Cash                                                                  10,000
             Notes payable                                                               10,000

 12/31/04 Interest expense                                                       1,000
              Cash                                                                        1,000

 12/31/05 Interest expense                                                       1,000
          Notes payable                                                         10,000
              Cash                                                                        1,000
NOTES NOT ISSUED AT FACE VALUE (ZERO INTEREST)
On 1-1-01, ABC, Incorporated issued a 3-year, $20,000, zero-interest bearing note to the bank,
receiving cash of $15,026.30. The note, which matures on 12-31-03, is shown below:

                              Promissory Note
January 1, 2001
On or before 12-31-03, ABC, Inc., promises to pay First National Bank $20,000.

                                                          John Smith
                                                          President, ABC Inc.

REQUIRED: Complete the amortization schedule below and then record the entries over the life of the note.

                                                         AMORTIZATION TABLE
                                                           Interest Discount          N/P
                         IRR Computation        Date      Expense    on N/P         Balance
                                15,026.30         1/1/01            4,973.70       20,000.00
                                      -         12/31/01 1,502.63 3,471.07         20,000.00
                                      -         12/31/02 1,652.89 1,818.18         20,000.00
                               (20,000.00)      12/31/03 1,818.18      (0.00)      20,000.00
                                   10.00%

  Date     Account Title & Explanation          Debit       Credit
  1/1/01 Cash                                 15,026.30
         Discount on notes payable             4,973.70
            Notes payable                                  20,000.00

12/31/01 Interest expense                      1,502.63
             Discount on notes payable                      1,502.63

12/31/02 Interest expense                      1,652.89
             Discount on notes payable                      1,652.89

12/31/03 Interest expense                      1,818.18
             Discount on notes payable                      1,818.18

12/31/03 Notes payable                        20,000.00
            Cash                                           20,000.00
fe of the note.
NOTE FOR CASH AND RIGHTS
On 1-1-04, a firm borrowed $600,000 from one of its customers and issued a $600,000, zero interest, 2-year
note. In consideration for the low interest rate, the customer obtained the right to buy all of a particular type of
merchandise at a 10% discount from regular prices. The firm expects the customer to purchase about equal
quantities of this merchandise in each year of the note’s duration. The current interest rate is 9%. Make all
the 2004 and 2005 entries.

Present value of $600,000 in 2 years discounted at 9%                  505,008.00
                                                                                            Balances
  Date       Account Title and Explanation               Debit           Credit       D on N/P    Un'd Rev
  1/1/04 Cash                                          600,000.00
         Discount on notes payable                      94,992.00                     94,992.00
            Notes payable                                              600,000.00
            Unearned revenue                                            94,992.00                    94,992.00

12/31/04 Unearned revenue                                47,496.00                                  (47,496.00)
            Sales                                                       47,496.00

12/31/04 Interest expense                                45,450.72
             Discount on notes payable                                  45,450.72     (45,450.72)
                                                                                       49,541.28     47,496.00 Bals
12/31/05 Unearned revenue                                47,496.00                                  (47,496.00)
            Sales                                                       47,496.00

12/31/05 Interest expense                                49,541.28
             Discount on notes payable                                  49,541.28    (49,541.28)
                                                                                     $     0.00 $           -     Bals
Notes issued for property, goods, and services with imputed interest example
On 12-31-03, a firm purchased a company car, signing a 2-year, 3%, $20,000 note calling for $10,000
principal plus the 3% interest payments on 12-31-04 and 12-31-05. The cash purchase price of the car was
$18,600. Make all entries for this two -year note.

                     Present value computations                Cash Flow
                                               Present value (18,600.00)
                                                  12/31/2004 10,600.00
                                                  12/31/2005 10,300.00
                                       Internal rate of return   8.1789%

 Date              Account Title and Explanation                  Debit         Credit
12/31/03 Automobiles                                             18,600.00
         Discount on notes payable                                1,400.00
            Notes payable                                                      20,000.00

12/31/04 Interest expense                                         1,521.27
         Notes payable                                           10,000.00
             Cash                                                              10,600.00
             Discount on notes payable                                            921.27

12/31/04 Interest expense                                           778.73
         Notes payable                                           10,000.00
             Cash                                                              10,300.00
             Discount on notes payable                                            478.73
Mortgage Notes Payable
On 1-1-05, a firm purchased an office building for $2,000,000 (cash equivalent price), paid $200,000 down and
and signed a 30-year, 9% mortgage. The firm pays an additional $60,000 (3 points) into escrow. (1) Compute
the monthly payments that begin 2-1-05. (2) Compute the effective interest rate. (3) Record the transaction.
(4) Record the 1/31/05 adjusting entry. (5) Record the first mortgage payment on 2/1/05.

(1) Computation of monthly payments                                                         $14,483.21
(2) Internal rate of return (monthly)                                                         0.78196%
                                                                                          1,740,000.00
                                                                                            (14,483.21)
                                                                                            (14,483.21)
                                                                                            (14,483.21)
   Date            Account Title and Explanation             Debit           Credit         (14,483.21)
 (3) 1/1/05 Office building                               2,000,000.00                      (14,483.21)
            Discount on mortgage payable                     60,000.00                      (14,483.21)
                Mortgage payable                                          1,800,000.00      (14,483.21)
                Cash                                                        260,000.00      (14,483.21)
                                                                                            (14,483.21)
(4) 1/31/05 Interest expense                                 13,606.09                      (14,483.21)
                Discount on mortgage payable                                    106.09      (14,483.21)
                Interest payable                                             13,500.00      (14,483.21)
                                                                                            (14,483.21)
 (5) 2/1/05 Interest payable                                 13,500.00                      (14,483.21)
            Mortgage payable                                    983.21                      (14,483.21)
                Cash                                                         14,483.21      (14,483.21)
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00,000 down and
w. (1) Compute
e transaction.



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posted:7/24/2011
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