So most people have difficulties with this section of the book. It really isn't too bad as long as you follow these 5 simple steps:Step 1: Find how many periods(payments) you have: # of years times # of periods per year Find the effective market rate to be used on the table: effective market % divided by the # of periods per year Step 2: Get table values from tables in appendix A: Present Value of $1 for # of periods at #% Present Value of annuity of $1 for for # of periods at #% Step 3: Get amount of interest payment: Face value of bond times purchase rate (% bond) times # of months divided by 12 months per year Step 4: Fill out the table below:
Step 5: plug into entry Cash (or what you're getting) Discount on bonds Payable(Note if a credit the account name is "Premium on Bonds Payable") Bonds payable Cash (or what you're getting) $ #Discount on bonds Payable # Bonds payable #Note: discount on bonds payable is the difference between Bonds payable and cash (or what you are getting) Here's an example: You get tired of shoveling snow after this last blizzard and decide to buy the biggest snow blower you can find in exchange for a 5 year $ 10,00012% bond payable every 6 months (payments are semiannual) at an effective interest rate of 13%. a) Journalize the entry to record the purchase of the snow blower. b) Journalize the first month's interest payment.a) Journalize the entry to record the purchase of the snow blower First: Find how many periods(payments) you have: # of years times # of periods per year = 5 years times 2 periods per year = 10 periods total Find the effective market rate to be used on the table: effective market % divided by the # of periods per year = effective market 13% divided by 2 periods per year=6.5% Second: Get table values from tables in appendix A: Present Value of $1 for 10 periods at 6.5% = 0.53273 Present Value of annuity of $1 for 10 periods at 6.5% = 7.18883 Third Get amount of interest payment: Face value of bond times purchase rate (% bond) times # of months divided by 12 months per year = Face value of bond $ times contract rate 10,00012% bond times 6 months (semiannual) divided by 12 months per year = $600Fourth fill out the table below:
Fifth plug into entry Cash (or what you're getting) Discount on bonds Payable(Note if a credit the account name is "Premium on Bonds Payable") Bonds payable Snow Blower $ 9640.598Discount on bonds Payable 359.402 Bonds payable 10,000Note: discount on bonds payable is the difference between Bonds payable and What you are getting (snow blower) |

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