Accounting for Bonds For each of the following situations ...



Name:_______________________________ Class Period: __________

Accounting 2210 Zeigler: Chapter 10 – Accounting for Bonds

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

1) Bee Gee Movie, Inc. will issue a $1 million bond offering on January 1, 2016 to finance an upcoming motion picture thriller entitled “Chasing the Accounting Dream”. The bond term will be four years. In July of 2015, 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): $_______________

PREMIUM SCENARIO (#1)

After we have priced the bond to reflect market conditions, we will account for the four-years of activity using the “Effective Interest Method”:

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

| | |A |B |C | |D |

| |Carry value (Present |Cash Interest |Interest |Current Period |Unamortized |Carry value (Present |

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

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

| | |__%) |__%) | |Discount |period |

|At Issue: |*********** |************ |********** |*********** |66,243 |*********** |

|2016 |1,066,243 |$100,000 |$85, 299 |($14,701) |$51,542 |$1,051,542 |

|2017 |$1,051,542 |$100,000 |$84,123 |($15, 877) |$35,665 |$1,035,665 |

|2018 |$1,035,665 |$100,000 |$82,853 |($17,147) |$18,518 |$1,018,518 |

|2019 |$1,018,518 |$100,000 |$81,481 |($18,518) | 0 | |

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

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

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

c) Prepare all necessary Journal Entries for Bee Gee Movie for the year 2016.

1/1/16 Cash $1,066,243

Premium on Bonds Payable $66,243

Bonds Payable $1,000,000

12/31/16 Interest Expense $85,299

Premium on B/Payable $14,701

Cash $100,000

2) Bee Gee Movie, Inc. will issue a $1 million bond offering on January 1, 2016 to finance an upcoming motion picture thriller entitled “Chasing the Accounting Dream”. The bond term will be four years. In July of 2015, 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): $_______________

DISCOUNT SCENARIO (#2)

After we have priced the bond to reflect market conditions, we will account for the four-years of activity using the “Effective Interest Method”:

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

| | |A |B |C | |D |

| |Carry value (Present|Cash Interest |Interest |Current Period |Unamortized |Carry value (Present|

|Period |value) |Payment |Expense |Amortization |(unallocated) |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: |*********** |************ |********* |************ |63,398 |*********** |

|2016 |936,602 | | | | | |

|2017 | | | | | | |

|2018 | | | | | | |

|2019 | | | | | | |

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

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

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

c) Prepare all necessary Journal Entries for Bee Gee Movie for the year 2016 (only).

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3) Bee Gee Movie, Inc. will issue a $1 million bond offering on January 1, 2016 to finance an upcoming motion picture thriller entitled “Chasing the Accounting Dream”. The bond term will be four years. In July of 2015, 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.

Be sure to draw timelines for Scenario #3, price the bond using present value techniques as we did in Scenario #1 and provide discussion. This will help you to confirm what we are doing.

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