Chapter 14 – Long-Term Liabilities
Solution One: Alternate Demonstration Problem
Using Straight Line Interest Method of Amortization
Chapter Fourteen
1. Calculation of cash received upon issuance of bonds (issue price):
Present value of $200,000 to be
received in 10 periods, discounted
$200,000 x .6439 = $128,780
discounted at 4.5% per period
$207,907
2. 1/1/15
Cash………………………………………………………….… 207,907
Bonds Payable……………………………………….. 200,000
Premium on Bonds Payable……………………. 7,907
4. 1/1/18
Bonds Payable…………………………………………….. 80,000.00
Premium on Bonds Payable…………………………. 1265.12*
Cash…………………………………………………….… 79,000.00
Gain on the Retirement of Bonds..……........ 2,265.12**
14-1
Chapter 14 – Long-Term Liabilities
Part B
1. * Calculation of cash received upon issuance of bonds (issue price):
Present value of $200,000 to be
received in 10 periods, discounted
at 8% per period
$200,000 x .4632 = $ 92,640
discounted at 8% per period
$159,741
2. 1/1/15
Cash………………………………………………………….… 159,741
Discount on Bonds Payable………………….……… 40,259
Bonds Payable……………………………………….. 200,000
3. 6/30/15
Bond Interest Expense……….……………………….. 14,025.90
4. 12/31/15
1/1/18
Bonds Payable…………………………………………….. 80,000.00
6,441.44)
** $80,000 – 6,441.44 = 73,558.56 Carrying
Value compared to Redemption Price
$79,000 = Loss 5,441.44
14-2
Chapter 14 – Long-Term Liabilities
Solution Two: Alternate Demonstration Problem
Using Effective Interest Method of Amortization
Chapter Fourteen
1.
Period
Beginning
of Period
Carrying
Amount
Interest
Expense
to be
Recorded
Interest
to be Paid
to Bond-
holders
Premium
to be
Amortized
Unamortized
Premium end
of Period
End-of-
Period
Carrying
Amount
0 $7,907 $207,907 *
1 $207,907 $9,356 $10,000 $644 7,263 207,263
2 207,263 9,327 10,000 673 6,590 206,590
3 206,590 9,297 10,000 703 5,887 205,887
9 201,865 9,084 10,000 916 949 200,949
10 200,949 9,051 10,000 949 0 200,000
* Calculation of cash received upon issuance of bonds:
Present value of $200,000 to be
received in 10 periods, discounted
at 4.5% per period
$200,000 x .6439 = $128,780
2. 1/1/15
3. 6/30/15
Bond Interest Expense……….……………………….. 9,356
Premium on Bonds Payable…………………………. 644
Cash…………………………………………………….… 10,000
14-3
Chapter 14 – Long-Term Liabilities
12/31/15
4. 1/1/18
Bonds Payable…………………………………………….. 80,000
Premium on Bonds Payable…………………………. 1,432
Cash…………………………………………………….… 79,000
Gain on the Retirement of Bonds..……........ 2,432
Part B
1.
Period
Beginning
of-Period
Carrying
Amount
Interest
Expense
to be
Recorded
Interest to
be Paid
to Bond-
holders
Discount
to be
Amortized
Unamortized
Discount end
of Period
End-of-
Period
Carrying
Amount
0 $40,259 $159,741 *
1 $159,741 $12,779 $10,000 $2,779 37,480 162,520
2 162,520 13,002 10,000 3,002 34,478 165,522
3 165,522 13,242 10,000 3,242 31,236 168,764
4 168,764 13,501 10,000 3,501 27,735 172,265
* Calculation of cash received upon issuance of bonds:
Present value of $200,000 to be
received in 10 periods, discounted
at 8% per period
$200,000 x .4632 = $ 92,640
14-4
2. 1/1/15
3. 6/30/15
4. 12/31/15
1/1/18
Bonds Payable…………………………………………….. 80,000
Loss on the Retirement of Bonds…………………. 6,948
Discount on Bonds Payable……………..….…. 7,948
Cash…………………………………………………….… 79,000
14-5