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Long-Term Liabilities Chapter 12 Exercises Journalizing Bond Transactions In-Class Exercises (Form groups and work exercises): Exercise No. E12-22 Page 730 Journalizing Bond Transactions (Use the format, as reflected on the next slide, to complete this exercise) Journalizing Bond Transactions General Journal Date Description Exercise E12-22 Debit Page 730 Journalizing Bond Transactions Credit Bond Pricing Exercise E12-22: Clark issued $50,000 of 10-year, 9% bonds payable on January 1, 2014. Clark pays interest each January 1 and July 1 and amortizes discount or premium by the straight-line method. The company can issue its bond payable under various conditions. Requirements: 1. Journalize Clark’s issuance of the bonds and first semiannual interest payment, assuming the bonds were issued at face value. 2. Journalize Clark’s issuance of the bonds and first semiannual interest payment, assuming the bonds were issued at 95. 3. Journalize Clark’s issuance of the bonds and first semiannual interest payment, assuming the bonds were issued at 106. Journalizing Bond Transactions Bonds issued at face value $50,000 x .09 x 6/12 = $2,250 Journalizing Bond Transactions Bonds issued at .95 $50,000 x .95 = $47,500 Journalizing Bond Transactions Bonds issued at .95 $50,000 - $47,500 = $2,500 Journalizing Bond Transactions Bonds issued at .95 ? $2,500 ÷ 20 = $125 Journalizing Bond Transactions Bonds issued at .95 $2,250 + $125 = $2,375 Journalizing Bond Transactions Bonds issued at 1.06 $50,000 x 1.06 = $53,000 Journalizing Bond Transactions Bonds issued at 1.06 $53,000 - $50,000 = $3,000 Journalizing Bond Transactions Bonds issued at 1.06 ? $3,000 ÷ 20 = $150 Journalizing Bond Transactions Bonds issued at 1.06 $2,250 - $150 = $2,100 Journalizing Bond Transactions End of Exercise Journalizing Bond Transactions In-Class Exercises (Form groups and work exercises): Exercise No. E12-28 Page 731 Present Value of Bonds Payable (Use the format, as reflected on the next slide, to complete this exercise) Pricing Bonds Using Present Value Prepare this schedule for each of the three stated requirements. Pricing Bonds Using Present Value Exercise E12-28: Interest rates determine the present value selling price of bonds. (Round all numbers to the nearest whole dollar) Requirements: 1. Determine the present vale of 7-year bonds payable, with a face value of $91,000, and stated (contract) interest rate of 14%. The market rate is 14% at issuance. 2. Same bonds payable as in Requirement 1, but the market interest rate is 16%. 3. Same bonds payable as in Requirement 1, but the market interest rate is 12%. 4. Note: First, determine the periodic interest payment, using the contract rate of interest. Pricing Bonds Using Present Value Determining Bond Interest Payment First, we need to calculate the semi-annual interest payment to be made to the bondholders. Equation: Principal x contract rate / 2 $91,000 x .14 = $12,740 / 2 = $6,370 Pricing Bonds Using Present Value Pricing Bonds Using Present Value Pricing Bonds Using Present Value Pricing Bonds Using Present Value End of Exercise Effective Interest Amortization Method In-Class Exercise (Form groups and work exercise): Exercise No. E12B-29 Page 732 Effective Interest Amortization Method (Use the format, as reflected on the next slide, to complete the exercise) Effective Interest Amortization Method Exercise E12B-29: Use your answers from Requirements 1-3 of Exercise E12A-28. Journalize issuance of the bond and the first semiannual interest payment under each of the three assumptions in Exercise E12A-28. The company amortizes bond premium and discount by the effective-interest amortization method. Effective Interest Amortization Method Market Rate = 14% Effective Interest Amortization Method Market Rate = 16% $91,000 - $83,454 = $7,546 Effective Interest Amortization Method Market Rate = 16% $83,454 x .08 = $6,676 Effective Interest Amortization Method Market Rate = 16% $6,676 - $6,370 = $306 Effective Interest Amortization Method Market Rate = 12% $99,431 - $91,000 = $8,431 Effective Interest Amortization Method Market Rate = 12% $99,431 x .06 = $5,966 Effective Interest Amortization Method Market Rate = 12% $6,370 - $5,966 = $404 Effective Interest Amortization Method End of Exercise