BEE GEE MOVIE - INITIAL ASSIGNMENT BOND HANDOUT



Name:_______________________________ Class Period: 1:30 2:30

Acct 2210 Zeigler: Chapter 10 – Accounting for Bonds (USE PENCIL)

For the three independent scenarios below, determine the bond selling price and prepare an amortization schedule using the “Effective Interest Amortization Method” as shown in Chp 10 & Appendix “F”.

1) Bee Gee Movie, Inc. plans to issue a $1 million bond offering on January 1, 2015 to finance an upcoming motion picture thriller entitled “Chasing the Accounting Dream”. The bond term will be four years. In July of 2014, due diligence was performed (audits, underwriting process, etc.) and the stated (contract) rate assigned to the bonds was 10% with annual payments to bond holders each December 31st. Based upon current market conditions, however, the marketplace will now only require an effective (market) interest rate (yield) of 8%.

a) Using whole dollars, determine the selling price of these bonds, using present value techniques in the appendices. Indicate whether a Premium or a Discount results. Show all written computations below.

Selling price of bonds (with computations and time-line completed below): $_______________

b) Complete the Amortization Schedule below using the “Effective Interest Method” (See Pg 553-557)

| | |Text ”A” |Text “B” |Text “C” | |Text “D” |

| |Carrying value |Cash Interest |Interest |Current Period |Unamortized |Carrying value |

|Period |(Present value) |Payment |Expense |Amortization |(unallocated) |(Present value) |

| |at beginning of |(at contract rate of|(at market rate of |(A vs. B) |Premium or |at end of |

| |period |___%) |___%) | |Discount |period |

|At Issue: |************ |************ |*********** |*********** |$ |************ |

|2015 | | | | | | |

|2016 | | | | | | |

|2017 | | | | | | |

|2018 | | | | | | |

| | | | | | |$1,000,000* |

| | | | | | |*Prior to payoff |

|Totals |*********** | | | |********** |xxxxxxxxxxx |

c) Prepare all necessary Journal Entries for Bee Gee Movie for the year 2015 (only).

2) Bee Gee Movie, Inc. will issue a $1 million bond offering on January 1, 2015 to finance an upcoming motion picture thriller entitled “Chasing the Accounting Dream”. The bond term will be four years. In July of 2014, due diligence was performed (audits, underwriting process, etc.) and the stated (contract) rate assigned to the bonds was 8% with annual payments to bond holders each December 31st. Based upon current market conditions, however, the marketplace will now require an effective (market) interest rate (yield) of 10%.

a) Using whole dollars, determine the selling price of these bonds, using present value techniques in the appendix. Indicate whether a Premium or a Discount results. Show all written computations below.

Selling price of bonds (with computations and time-line completed below): $_______________

b) Complete the Amortization Schedule below using the “Effective Interest Method” (See Pg 553-557)

| | |Text ”A” |Text “B” |Text “C” | |Text “D” |

| |Carrying value |Cash Interest |Interest |Current Period |Unamortized |Carrying value |

|Period |(Present value) |Payment |Expense |Amortization |(unallocated) |(Present value) |

| |at beginning of |(at contract rate of|(at market rate of |(A vs. B) |Premium or |at end of |

| |period |___%) |___%) | |Discount |period |

|At Issue: |************ |************ |*********** |*********** |$ |************ |

|2015 | | | | | | |

|2016 | | | | | | |

|2017 | | | | | | |

|2018 | | | | | | |

| | | | | | |$1,000,000* |

| | | | | | |*Prior to payoff |

|Totals |*********** | | | |********** |xxxxxxxxxxx |

c) Prepare all necessary Journal Entries for Bee Gee Movie for the year 2015 (only).

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3) Bee Gee Movie, Inc. will issue a $1 million bond offering on January 1, 2015 to finance an upcoming motion picture thriller entitled “Chasing the Accounting Dream”. The bond term will be four years. In July of 2014, due diligence was performed (audits, underwriting process, etc.) and the stated (contract) rate assigned to the bonds was 8% with annual payments to bond holders each December 31st. Market conditions have not changed since July and the marketplace will accept an effective (market) interest rate (yield) of 8%.

Selling price of bonds: $_______________

Compute the selling price of the bonds below and explain why no amortization schedule is required.

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