exam 3 acct
you borrow $5000 for 2 years at a simple interest rate of 12% annually. interest=
$1200 principal (5000) x rate (0.12) x time (2)
you have a winning lottery ticket and the state gives you the option of receiving $10,000 three years from now or receiving $10,000 now. the annual discount rate is 8%.
$7,938.3 present value of a single amount
how much face value are bonds that are issued at 100 sold for?
100%
John & Mary Rich invested $20,000 in a savings account paying 6% interest. what table would you use?
Future value
corporations do not record bond transactions when
bondholders sell their bond investments to other investors
candlestick inc. issues five-year, 10%, $100,000 bonds dated Janurary 1, 2025, at 100 (100 % of face value). interest is payable annually on Janurary 1. write the journal entry by Candlestick to issue bonds on Jan 1, 2025.
debit: cash $100,000 credit: bonds payable $100,000
on Jan 1, 2025, Candlestick Inc issues $100,000, 5 year, 10% bonds for $102,000 (102% of face value). interest payable annually on Jan 1
debit: cash $102,000 credit: premium on bonds payable $2000 credit: bonds payable $100,000
what is the function for interest?
face value x stated rate x time period
on the balance sheet, what are bonds recorded as?
long-term liability
contractual/stated interest rate
rate to determine cash interest paid, stated as an annual rate (or sometimes semiannual)
simple interest
requires that interest be computed on the principal only
a dollar recieved today worth more now or tomorrow?
tomorrow
you deposit $1000 in citizens bank for three years, where it will earn compound interest of 9% per year compounded annually.
$1295.03 future value of a single amount. use table
you plan to deposit cash in your super savings account today, that pays 9% interest annually, in order to accumulate $5,000 for a down payment 4 years from now on a new car
$3,542.15 present value of a single amount
what is interest payable classified as?
a current liability
convertible bonds
can be converted into common stock at option of the bondholder
what are the two interest rates?
contract rate and market rate
the additional cost of borrowing a issuance of bonds at a discount is...
different between the issuance price and face value of the bond-the discount
bond certificate
issued to investor. provides key information about the bonds
discount on bonds payable has a normal debit or credit balance?
normal debit balance
interest
payment for the use of another party's money
bondholder
the person who buys the bonds and is investing in the bonds
contractual interest rate
the rate applied to the face (par) value to arrive at the interest paid in a year
what is the marekt interest rate affected by?
the type of bond issued, the state of the economy, current industry conditions, and the company's performance
John and Char Lewis' daughter, Debra, has just started high school. They decide to start a college fund for her and will invest $2,500 in a savings account at the end of each year she is in high school (4 payments total). The account will earn 6% interest compounded annually.
$10,936.55 future value of annuity
a bond issue of 5%, 10 year bonds with a face value of $100,000 with interest payable annually on January 1.
$100,000 present value of a bond 1. pv of principal $100,000 (principal) x 0.61391 (factor)= $61,391 (present value) 2. pv of interest $5,000 (payment) x 7.72173 (factor)= $38,609 (present value) 3. 61,391+38,609=$100,000
davis depot invested $12,000 in a savings account paying 4% interest at the beginning of 2025, to accumulate funds to buy a new forklift on the first day of 2030. how much will be available to buy the forklift?
$14,600 FV of single amount 12,000 x 1.21665
davis depot plans to invest $3,500 in a savings account paying 4% interest at the beginning of each year for 5 years to fund the replacement of a forklift. how much will be available to buy the forklift?
$18,957.12 FV of annuity $3,500 x 5.41632
kildare company has just signed a contract for equipment that requires payments of $6000 each, to be paid at the end of each of the next 5 years. the appropriate discount rate is 12%
$21,628.68 present value of annuity
a bond issue of 4%, 8 year bonds with a face value of $30,000 with interest payable annually on Jan 1. market interest rate is 6%. what is the present value of the bonds?
$26,274 interest payments= 4% x $30,000= $1,200 PV of principal to be received at maturity: $30,000 x PV of 1 due in 8 periods at 6% $30,000 0.62741 (table 3)=$18,822 PV of interest to be received periodically over bond term $1,200 x PV of 1 due periodically for 8 periods at 6% $1,200 x 6.20979 (table 4)=$7,452
davis inc. has budgeted payments of $11,000 a year to buy new equipment. at a 6% discount rate, the company plans to finance annual payments for 4 years. what is the cost of equipment that davis can afford?
$38,116.21 present value of annuity
John and Mary Rich invested $20000 in a savings account paying 6% interest at the time their son, Mike, was born. The money is to be used by Mike for his college education. On his 18th birthday, Mike withdraws the money from his savings account.
$57,086.80 future value of a single amount
you invest $2000 at the end of each year for three years at 5% interest compounded annually.
$6,305 future value of an annuity
davis plans to invest money in an investment fund paying 7% interest at the beginning of 2025, to accumulate $11,000 to take a two-week cruise on the last day of 2028. how much will david dsposit today to achieve the desired $11,000?
$8,391.90 PV of single amount $11,000 x 0.76290
you want to invest a sum of money today that will provide $1000 at the end of two years compounded annually/ the return expected is 10%.
$826.45 present value of a single amount
what is interest dependent on?
PIN: principal, interest rate, and time
If you have an investment or won a lottery that pays you $10,000 a year for 20 years, assuming a standard market rate of 8%, what table would you use?
Present value annuity
where would bonds payable of discount be, income statement, balance sheet or statement of cash flows? where is it placed?
a contra account deducted from bonds payable on the balance sheet
laurel inc issues 1-year bonds with a maturity value of $200,000. if the bonds are issued at a premium, this indicates that a) the contractual interest rate exceeds the market interest rate b) the market interest rate exceeds the contractual interest rate c) the contractual interest rate and the market interest rate are the same d) no relationship exists between the two rates
a) the contractual interest rate exceeds the market interest rate
principal
amount borrowed or invested
interest rate
an annual percentage
if compounding occurs other than annually, for example monthly, how would you calculate?
annual rate divided by 12 months number of years x 12 months
if compounding occurs other than annually, for example semiannually, how would you calculate?
annual rate divided by 2 semiannual periods number of years x 2 semiannual periods
unsecured bonds (debenture bonds)
are issued against general credit of borrower
how may bonds be issued?
at face value, below face value at a discount, or above face value at a premium
as discount is amortized what happens?
balance in discount on bonds payable declines and carrying value of bonds increases until the maturity carrying value of bonds equals their face amount
bond trading
bondholder can sell their bonds at any time on national securities exchanges. prices are quoted as a percentage of face value
when a corporation issues bonds, it is...
borrowing money
callable bonds
can be redeemed prior to maturity at option of the bond issuer
what happens to bonds if the contractual and market rates are different?
causes bonds to sell below or above face value
increase in the bonds' selling price
causes the actual interest rate incurred by the company to decrease to the current market interest rate
for a issuance of bonds at a discount, the issuing corporation must pay both...
contractual interest payments over the term of the bonds and the face value at maturity
when bonds sell at face value (par value):
contractual interest rate and the market interest rates are the same
maturity date
date final payment is due
jimenez issues 9%, 8 year $2,600,000 par value bonds that pay interest annually. the discount rate of interest on issue date is 10%. write the journal entry
debit: cash $2,461,300 debit: discount on bonds payable $138,700 credit: bonds payable $2,600,000
kirby railroad company is about to issue $300,000 of 10 year bonds paying a 9% interest rate, interest paid annually. the discount rate is 8%. write the journal entry.
debit: cash $320,129 credit: premium on bond payable $20,129 credit: bond payable $300,000
on jan 1, 2025, candlesitck inc issues $100,000, five year, 10% bonds for $98,000 (98% of face value). interest is payable annually on jan 1. write the journal entry
debit: cash $98,000 debit: discount on bonds payable $2,000 credit: bonds payable $100,000
candlestick inc. accrued interest on its five-year, 10%, $100,000 bonds dated Jan 1, 2025, issued at 100. write the journal entry by Candlestick to accrue interest on Dec 31, 2025
debit: interest expense $10,000 credit: interest payable $10,000 interest=$100,000 x 10% x 1/1= $10,000
when bonds sell for less than their face value is called:
discount
jimenez issues 9%, 8 year $2,600,000 par value bonds that pay interest annually. the discount rate of interest on issue date is 10%. will this bond sell at a premium, discount or face value? what was the cash proceeds from the issuance of the bonds?
discount; $2,461,300 1. present value of principal $2,600,000 x 0.46651*=$1,212,926 *PV of $1 due in 8 periods at 10% from table 3 2.present value of interest payments interest payments: $2,600,000 x 9%=$234,000 payable annually $234,000 x 5,33493*=$1,248,374 *PV of annuity of $1 due each period for 8 periods at 10$ from table 4 3. present value of bond $1,212,926+$1,248,374= $2,461,300 present value of bond
John & Char Lewis invest $2,500 in a savings account at the end of each year for 4 years. The account earns 6% interest compounded annually. what table would you use?
future value of annuity
secured bonds
have specific assets of issuer pledged as collateral for bonds
where is interest expense reported on?
income statement
what happens to the carrying value of bonds
increases as amortization occurs and equals the bonds' face amount at maturity
what does compound interest result in?
increasing interest each period when no amounts have been withdrawn or added
the additional cost of borrowing issuance of bonds at a discount is recorded as what?
interest expense over the term of the bonds
what does compound interest compute?
interest not only on the principal but also on the interest earned to date on that principal, assuming the interest is left on deposit
present value of a bond
is a function of three variables; the payment amounts, the length of time until the amounts are paid, the discount rate
on Dec 1, Somart issues $40,000 of 6 year, 5% bonds for $38,600. interest is payable annually on may 1. record the issuance of the bonds on Dec 1 and show how the bonds will be reported on the balance sheet at the date of issuance
journal entry: debit: cash $38,600 debit: discount on bonds payable $1,400 credit: bonds payable $40,000 balance sheet: long term liabilities bonds payable $40,000 less: discount on bonds payable 1,400 =$38,600
what are some characteristics of bonds?
long-term liabilities, a form of interest-bearing notes payable issued by corporations, Universities and government agencies, sold in denominations, usually accompanied by periodic interest payment
when bonds sell for less than their face value
market rate of interest is greater than the contractual rate
when bonds sell for more than their face value
market rate of interest is less than the contractual rate
what does the bond certificate provide?
name of company issuing bonds, face value, maturity date and contractual (stated) interest rate
you receive $800 at the end of every six months for 5 uears and you're bank pays 8% interest. calculate number of periods and interest rate
number of period= 5x2 per year=10 periods interest rate=8% divided by 2=4%
long-term liabilities
obligations that are expected to be paid after one year
when bonds sell for more than their face value is called:
premium
kirby railroad company is about to issue $300,000 of 10 year bonds paying a 9% interest rate, interest paid annually. the discount rate is 8%. will this bond sell at a premium, discount, or face value? how much will kirby receive for the sale of these bonds?
premium; $320,129 1. present value of principal $300,000 x 0.46319*=$138,957 *PV of 1$ due in 10 periods at 8% from table 3 2. present value of interest payments interest payments: $300,000 x 9%=$27,000 payable annually $27,000 x 6.71008*=$181,172 *PV of annuity of 1$ due each period for 10 periods at 8% from table 4 3. present value of bond $138,957+$181,172=$320,129
determine the amount you must deposity now in your savings account, paying 9% interest, in order to accumulate $5,000 for a down payment 4 years from now on a new car. what table would you use?
present value of single
contract rate
rate on the bond itself
market/effective interest rate
rate that investors are currently demanding and receiving on similar investments. not listed on bond certificate
market rate
rateof interest currently demanded by investors on similar investments
what are the four types of bonds?
secured, unsecured, convertible, and callable bonds
annuity
series of payments or receipts of equal dollar amounts
when is interest the same each year: simple or compound?
simple interest
calculate both simple interest and compound interest for the following situation: two banks deposits of which no withdrawals will occur until three years from the date of deposit: bank two: deposit of $1000 earning a 9% annual simple interest citizens bank: deposit of $1000 earning 9% interest compounded annually
simple interest: $1270 compound interest: $1295.03 app F slide 8 for extra help
what table would you use to find the present value of principal?
table 3/ present value of 1
what table would you use to find the present value of interest payments?
table 4/ present value of annuity
decline in the bonds' selling price causes
the actual interest rate incurred by the company to increase to the current market interest rate
amortitizing the discount
the allocation to expense in each period in which the bonds are outstanding
what is the time value of money used to determine
the market price of bonds
market interest rate
the rate investors demand for loaning funds to the corporation, changes daily
compound interest
the return on (or growth of) the principal for two or more time periods
future value of annuity
the value at a future date of series of amounts to be paid or received at evenly spaced time intervals. the sum of all the payments plus the accumulated compound interest on them
future value of single amount
the value at the future date of a given amount invested, assuming compound interest
present value
the value now of a given amount to be paid or received in the future, assuming compound interest
present value of an annuity
the value now of a series of equal future receipts or payments, discounted assuming compound interest
croporations record bond transactions when
they issue (sell) bonds, they redeem (buy back) bonds, bondholders convert bonds into common stock, bond interest is accured or paid
what is contract rate used for?
used to calculate the interest payments
what is market rate used for?
used with tables to calculate present value
when will present value bonds = face value of bonds
when the investor's market interest rate is equal to the bond's contractual interest rate