appendix b + c14 (exam 3)

compounding interest

-In the present value formula, annual interest can be transformed into interest earned per (n) periods. -Interest can be compounded daily, monthly, quarterly or annually. -Interest is added to a sum of money at the end of a period and then, this new sum is used to figure the interest amount for the next period, etc. -If the rate of interest is 10% compounded monthly, then interest is figured 12 times during the year.

to determine the present value of a sum

-The interest rate charged -The future amount of money needed -The number of periods the sum will be earning interest

par value: 7,000 carrying value: 6,752 rate: 8%, two year market rate: 10%, selling price: 6,752 use the straight-line method to amortize the discount + prepare journal entry: issuance of bonds on 12/31/20X1

-discount: 248 (7,000-6,752) -pay per period: 62 (248/4 semiannual periods) -unamortized discount decreases $62 per period -carrying value: 6,752, increases $62 per period D cash 6,752 D discount on bonds payable 248 C bonds payable 7,000

Jack is considering an investment that is expected to return $1,000 four years from now. If he wants a 9% return, calculate the amount of money he is willing to pay for this investment

1,000 x.7084 = $708.40

Blake is offered the possibility of investing $1,652.80 today at 10%, in a desire to accumulate $2,000. Calculate the number of years that Blake must wait to accumulate $2,000

1,652.80 divided by 2000 = .8264 and 2 periods at 10% = .8264 so 2 years

disadvantages of bonds

1. bonds can decrease return on equity 2. bonds require payment of both periodic interest and the par value at maturity

advantages of bonds

1. bonds do not affect owner control 2. interest on bonds is tax deductible -financing something and getting a tax deduction by paying all interest back 3. bonds can increase return on equity

Luna is considering an investment that is expected to return $5,000 five years from now. If she wants a 10% return calculate the amount of money she is willing to pay for this investment

5,000 x.6209 = 3104.50

tomorrow; multiple; each

A person can use the future value concept and apply it to an annuity to calculate how much money he will have ______ if he makes ________ periodic payment(s) at the end of _____ period.

present value of an ordinary annuity today; multiple; future

A person can use the present value concept and apply it to an annuity to calculate how much money he has to invest (today, tomorrow) in order to receive (multiple, one) periodic payment(s) in the (present, future).

today; future

A person can use the present value concept to calculate how much money he has to invest ___ in order to have a specific sum of money in the ____.

ordinary annuity

An ordinary annuity is a series of equal payments occurring at the end of the period at equal intervals.

interest payment

Bond Par Value x Stated Interest Rate x Time

Adonis Corporation issued 10-year, 8% bonds with a par value of $200,000. Interest is paid semiannually. The market rate on the issue date was 7.5%. Adonis received $206,948 in cash proceeds.

C.Adonis must pay $200,000 at maturity plus 20 interest payments of $8,000 each.

interest payment first through fourth on each 6/30 and 12/31 (par value) par value: 7,000 interest rate: 8% interest dates: 6/30 and 12/31 maturity date: 12/31/19 (in 2 years)

D bond interest expense 280 C cash 280 (7,000 x .08/ 2)

par value: 7,000 cash proceeds: 6,752 rate: 8%, two year use the straight-line method to amortize the discount + prepare journal entry: 1st thru 4th interest payments

D bond interest expense 342 (280/62) C discount on bonds payable 62 C cash 280 (7,000x.08/2) same for every payment period

1,000 par value, semiannual interest payments, 2 yr life, 4% semiannual contract rate, market rate = 5% record journal entry for semiannual interest and discount amortization (effective method)

D bond interest expense 4,823 C discount on bonds payable 823 C cash 4,000

par value: 100,000 issue price: 103.546% cash proceeds/carrying value: 103,546 (par value x issue price) premium: 3,546 record semiannual interest and premium amortization (straight line)

D bond interest expense 5,113 D premium on bonds payable 887 (3,546/4) C cash 6,000 (100,000 x 12% x 0.5)

1,000 par value, semiannual interest payments, 2 yr life, 6% semiannual contract rate, market rate = 5% record journal entry for semiannual interest and premium amortization (effective method)

D bond interest expense 5,177 D premium on bonds payable 823 C cash 6,000

on 1/1, $100,000 par value bonds carrying value: 100,000 converted to 15,000 shares of $2 par value common stock record bond retirement by conversion

D bonds payable 100,000 C common stock 30,000 (15,000 x $2 value per share) C paid-in capital in excess of par value 70,000

100,000 of callable bonds will be retired on 7/1/2017, after the first interest payment. bond carrying value: 104,500 call premium: 3,000 record journal entry of bond retirement before maturity

D bonds payable 100,000 D premium on bonds payable 4,500 (104,500 - 100,000) C gain on bond retirement 1,500 C cash 103,000 (par value or bonds payable 100,000 + premium 3,000)

100,000 of callable bonds will be retired on 7/1/2017, after the first interest payment. bond carrying value: 104,500 call premium: 3,000 record retirement of bonds at maturity

D bonds payable 100,000 C cash 100,000

par value: 7,000 cash proceeds: 6,752 rate: 8%, two year use the straight-line method to amortize the discount + prepare journal entry: maturity of bond 12/31/20X3

D bonds payable 7,000 C cash 7,000

pay bond principal at maturity (par value) par value: 7,000 interest rate: 8% interest dates: 6/30 and 12/31 maturity date: 12/31/19 (in 2 years)

D bonds payable 7,000 C cash 7,000

borrowed 1,000 signing 4 year 5% installment note requiring 4 equal payments of accrued interest and principal payment = 282 record borrowing entry

D cash 1,000 C notes payable 1,000

par value: 100,000 issue price: 103.546% cash proceeds/carrying value: 103,546 (par value x issue price) premium: 3,546 sold bonds at a premium on their issue date

D cash 103,546 C premium on bonds payable 3,546 C bonds payable 100,000

borrow 60,000 by signing 8% installment note, 3 annual payments of principal + interest record borrowing entry

D cash 60,000 C notes payable 60,000

issuance of bonds on 12/31/17 (par value) par value: 7,000 interest rate: 8% interest dates: 6/30 and 12/31 maturity date: 12/31/19 (in 2 years)

D cash 7,000 C bonds payable 7,000

sold/ issue bonds at a discount on their issue date par value: 100,000 cash proceeds: 96,454* (*100,000 x 96.454%) discount: 3,546

D cash 96,454 D discount on bonds payable 3,546 C bonds payable 100,000

borrow 60,000 by signing 8% installment note, 3 annual payments of principal + interest record second installment payment

D interest expense 3,321 D notes payable 19,961 C cash 23,282

borrow 60,000 by signing 8% installment note, 3 annual payments of principal + interest record first installment payment

D interest expense 4,800 D notes payable 18,482 C cash 23,282

borrowed 1,000 signing 4 year 5% installment note requiring 4 equal payments of accrued interest and principal payment = 282 record first installment payment

D interest expense 50 D notes payable 232 C cash 282

A company issued 8%, 15-year bonds with a par value of $550,000 that pay interest semiannually. The market rate on the date of issuance was 8%. The journal entry to record each semiannual interest payment is:

Debit Bond Interest Expense $22,000 Credit Cash $22,000. 550,000 x .08 (market rate) /2 = 22,000

A company issues $100,000 of 6%, 5-year bonds dated January 1 that pay interest semiannually. The bonds are issued when the market rate is 8%. The present value tables indicate the present value factor of an annuity for 3% at 10 periods is 8.5302; and for 4% at 10 periods is 8.1109. To find the present value of the interest payments, multiply _______ by the present value factor _________.

Interest payment = $100,000 x 6% x 1/2 = $3,000. Interest payments are discounted at bonds' market value. Present value=1/2 of the market rate (4%) and double the number of periods (10).

times; year

The present value or future value of a sum of money can be calculated as long as we know the number of ____ that interest will be compounded within one ____.

bond sells at discount

contract rate < market rate -discount on bonds payable: contra-liability account -always a DEBIT

bond sells at par

contract rate = market rate

bond sells at premium

contract rate > market rate -always a CREDIT -adjunct-liability account (adds to the value of liability) carrying value > par value

convertible and callable bonds

convertible bonds can be exchanged for a fixed number of shares of the issuing corporation's common stock. -offers holders the potential to participate in future increases in stock price -holders still receive periodic interest while the debt is held and the par value if they held the debt to maturity -holders decide if they want to convert debt to stock Callable bonds have an option exercisable by the issuer to retire them at a stated dollar amount before maturity

pay bond principal at maturity (par value) par value: 100,000 interest rate: 8% interest dates: 6/30 and 12/31 maturity date: 12/31/19 (in 2 years)

debit bonds payable 100,000 credit cash 100,000

par value: 100,000 issue price: ? states interest: 8% market interest: 10% interest dates: 6/30 and 12/31 and maturity in 2 yrs

discount cash payment of 4,000 = 100,000 x 0.08 / 2 present value: semiannual rate = 5% (10%/2 interest payments) semiannual periods = 4 (bond life 2 yrs x 2 interest payments)

Calculate the future value of $250 invested for 4 periods at 9% by using the future value of a single amount formula: f= p x (1+i) n

f = $250 x (1+.09)^4 352.90

Calculate the future value of $400 invested for 3 periods at 8% by using the future value of a single amount formula: f= p x (1+i) n

f= $400 x (1+.08)3 503.88

Clabber Company has bonds outstanding with a par value of $106,000 and a carrying value of $100,900. If the company calls these bonds at a price of $98,000, the gain or loss on retirement is:

gain of 2900 call of bonds - carrying value = gain or loss if it's 151,000 - 147,950 = 3050 is a loss if it's 98,000 - 100,900 = -2900 that's a gain credit while a loss is a debit

carrying value > retirement price

gain on bond retirement -credit

bond retirement

issuers choose to retire some or all of their bonds prior to maturity if the interest rates decline greatly, -might replace high interest paying bonds with low interest -can exercise a call option (makes the bond go away) -purchase them on an open market -just pay it off -covert it to stock

carrying value < retirement price

loss on bond retirement -debit

Compute Present Value

p = f / (1+ i)n p = present value f = future value i = rate of interest per period n = number of periods

pay semiannual interest ((8% x 100,000)/2 = 4,000)

par value: 100,000 interest rate: 8% interest dates: 6/30 and 12/31 maturity date: 12/31/19 (in 2 years) debit bond interest expense 4,000 credit cash 4,000 *this entry is made every 6 months until bonds mature

issue/sold bonds at par value

par value: 100,000 interest rate: 8% interest dates: 6/30 and 12/31 maturity date: 12/31/19 (in 2 years) debit cash 100,000 credit bonds payable 100,000

Interest

payment by the borrower to the owner of an asset for its use.

par value: 100,000 issue price: ? states interest: 12% market interest: 10% interest dates: 6/30 and 12/31 and maturity in 2 yrs

premium cash payment of 6,000 = 100,000 x 0.12 / 2 present value: semiannual rate = 5% (10%/2 interest payments) semiannual periods = 4 (bond life 2 yrs x 2 interest payments)

periodic payment of notes payable

present value of the note/ present value factor (usually given, no need to check table) 60,000/2.5771 = 23,282

registered and bearer bonds

registered: bonds issued in the names and addresses of their holders; under a specific name -issuer makes bond payments by sending checks to the registered holder (must notify the issuer of any ownership changes) -offer the issuer the practical advantage of not having to actually issue bond certificates bearer (unregistered bonds): opposite, bonds payable to whoever holds them physically -sales or exchanges might not be recorded; whoever holds the bearer bond is presumed to be the rightful owner -lostt bearer bonds are difficult to replace

Sinking fund bonds

requires issuer to create a sinking fund of assets set aside at specified amounts and dates to repay the bonds -reduces holders' risk -set one up if you're worried that you're not going to get paid back -borrower has to take money aside at predetermined dates and put it into an account to make sure you'll be able to be paid back

secured and unsecured bonds

secured/safer type: specific assets of the issuer pledged as collateral; the borrower had to put up something of value to ensure that the lender would get paid even if they fail to make payments -gives hold there's added protection against the issuer's default; if the issuer fails to pay interest or par value, the secured holders can demand that the collateral be sold and they get the proceeds for the obligation unsecured: opposite, also called debentures -backed solely by the issuers' general credit standing; riskier -subordinated debentures: more liabilities in front that has to be paid

term and serial bonds

term: scheduled for maturity on one specific date (one date) serial: mature at more than one date; repaid over a number of periods (many dates)

use stated interest rate to determine...

the interest payment to figure out present value factor, use market rate

debt to equity ratio

total liabilities/total equity -helps investors determine the risk of investing in a company by dividing total of liability by total equity -the higher, the more difficult to pay back