1. Explanation Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations. Effective-interest method of amortization: It is an amortization model that apportions the amount of bond discount or premium based on the market interest rate. Present Value: The value of today’s amount expected to be paid or received in the future at a compound interest rate is called as present value. Determine the issuance price of the bonds. Step 1: Calculate the cash interest payment for bonds. Cash interest payment = Face value × Coupon rate × Interest time period = $ 200 , 000 × 6 % × 1 = $ 12 , 000 Step 2: Calculate the present value of cash interest payment. Particulars Amount Interest payment (a) $4,000 PV factor at annual market interest rate of 8% for 10 periods (b) 6.71008 Present value ( a ) × ( b ) $80,521 Table (1) Note: The present value factor for 10 periods at 8% interest would be 6.71008 (Refer Appendix E (Table E 2. To determine Calculate the amount of interest expense that is recorded on December 31 of this year. 3. a. To determine Identify the effect on debt-to-equity ratio and times interest earned ratio, if the bonds are issued. b. To determine Identify the effect on debt-to-equity ratio and time interest earned ratio, if interest expense is recorded and cash is paid for interest to the investors.

10th Edition

ISBN: 9781260918373

Author: Libby

Publisher: INTER MCG

See similar textbooks

Concept explainers

Debenture Valuation

A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as th…

Note Valuation

It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:

Videos

Question

Chapter 10, Problem 5P

To determine

Calculate the issuance price of the bonds on January 1.

To determine

Calculate the amount of interest expense that is recorded on December 31 of this year.

To determine

Identify the effect on debt-to-equity ratio and times interest earned ratio, if the bonds are issued.

To determine

Identify the effect on debt-to-equity ratio and time interest earned ratio, if interest expense is recorded and cash is paid for interest to the investors.

Expert Solution & Answer

Chapter 10 Solutions

FINANCIAL ACCOUNTING ETEXT CARD

Ch. 10 - Prob. 1Q Ch. 10 - 2. What are the primary characteristics of a bond?...Ch. 10 - 3. What is the difference between an unsecured and...Ch. 10 - 4. Differentiate between a bond indenture and a...Ch. 10 - 5. What is a bond covenant? Ch. 10 - 6. Differentiate between a bond coupon rate and...Ch. 10 - 7. Explain what determines whether a bond is...Ch. 10 - 8. When calculating the present value of a bond’s...Ch. 10 - 9. What is the book value of a bond? Ch. 10 - Prob. 10Q

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Recommended textbooks for you

FINANCIAL ACCOUNTING
Accounting
ISBN:9781259964947
Author:Libby
Publisher:MCG
Accounting
Accounting
ISBN:9781337272094
Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:Cengage Learning,
Accounting Information Systems
Accounting
ISBN:9781337619202
Author:Hall, James A.
Publisher:Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis...
Accounting
ISBN:9780134475585
Author:Srikant M. Datar, Madhav V. Rajan
Publisher:PEARSON
Intermediate Accounting
Accounting
ISBN:9781259722660
Author:J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:9781259726705
Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:McGraw-Hill Education