Explanation Effect Interest Rate Method: Effect interest rate method computes the interest expense by multiplying the historical market rate of interest by the beginning balance of the debt. Following is the calculation for computing price of issuing the bond in Excel: Table (1) Therefore, price of the bond is $1,262.330. Following is the partial amortized table prepared for the bond issue by using straight line interest method: Period Total Payment (in $) Effective Interest (in $)t Principal Amount of Payment (in $) Carrying Value (in $) 0 1,262,330 1 37,500 37 , 500 + 16 , 976 = 54 , 476 16,976 1,279,306 2 37,500 37 , 500 + 16 , 976 = 54 , 476 16,976 1,296,282 3 37,500 37 , 500 + 16 , 976 = 54 , 476 16,976 1,313,258 4 37,500 37 , 500 + 16 , 976 = 54 , 476 16,976 1,330,234 Table (2) Principal payment amount is being deducted from the previous period’s carrying value each year for calculating the current period’s carrying value Effective interest should be computed by added cash interest and discount amount

2nd Edition

ISBN: 9780134730370

Author: Elizabeth A. Gordon, Jana S. Raedy, Alexander J. Sannella

Publisher: PEARSON

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Chapter 14, Problem 14.17BE

To determine

The issue price of the bond and prepare amortization table.

Given information:

Company issued bonds worth $1,500,000.

Term period for conversion is 7 years.

Interest is payable semi-annually each January 1 and July 1.

Market rate of interest is 8%.

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Chapter 14, Problem 14.16BE

Chapter 14, Problem 14.18BE

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Which statement is correct when the effective-interest method is used to amortize bond premium or discount? Group of answer choices The interest expense increases each period if the bonds were issued at a premium. The carrying amount at the end of the first year would be highest if the bonds were issued at a discount. The periodic amortization will increase regardless of whether the bonds were issued at either a discount or a premium. The periodic amortization will increase or decrease depending on whether the bonds were issued at a premium or at a discount.

Compute bond proceeds, amortizing premium by interest method, and interest expense DATA Face amount of bonds Contract rate of interest Term of bonds, years Market rate of interest Interest payment REQUIRED: a. Compute the amount of cash proceeds from the sale of the bonds. $41,000,000 11% 3 9% Semiannual b. Compute the amount of premium to be amortized for the first semiannual interest payment period, using the interest method. c. Compute the amount of premium to be amortized for the second semiannual interest payment period, using the interest method. d. Compute the amount of the bond interest expense for the first year. Using formulas and cell references from the problem data, perform the required analysis. Formulas entered in the green cells show in the orange cells. Transfer amounts to CNOWv2 for grading. a. PV of cash proceeds b. Premium amortized for the 1st interest payment period c. Premium amortized for the 2nd interest payment period d. Interest expense for the 1st year…

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Chapter 14 Solutions

Intermediate Accounting (2nd Edition)

Ch. 14 - What conditions or terms does a note payable...Ch. 14 - If the market rate of interest exceeds the face or...Ch. 14 - What is included in bond issue costs and how...Ch. 14 - Prob. 14.4Q Ch. 14 - When a bond is issued at a discount, will its...Ch. 14 - Prob. 14.6Q Ch. 14 - Prob. 14.7Q Ch. 14 - Under IFRS, how do firms account for convertible...Ch. 14 - Prob. 14.9Q Ch. 14 - Can companies reclassify short-term debt expected...

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The issue price of the bond and prepare amortization table. Given information: Company issued bonds worth $1,500,000. Term period for conversion is 7 years. Interest is payable semi-annually each January 1 and July 1. Market rate of interest is 8%.

Solution Summary: The author explains the effect interest rate method, which computes interest expense by multiplying the historical market rate of interest by the beginning balance of the debt.

The issue price of the bond and prepare amortization table. Given information: Company issued bonds worth $1,500,000. Term period for conversion is 7 years. Interest is payable semi-annually each January 1 and July 1. Market rate of interest is 8%.

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Chapter 14 Solutions

The issue price of the bond and prepare amortization table.

Given information:

Company issued bonds worth $1,500,000.

Term period for conversion is 7 years.

Interest is payable semi-annually each January 1 and July 1.

Market rate of interest is 8%.