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 $10,000 12% 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 $10,000 times contract rate 12% bond times 6 months (semiannual) divided by 12 months per year = $600 Fourth 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 $ 9640.598 Discount on bonds Payable 359.402 Bonds payable 10,000 Note: discount on bonds payable is the difference between Bonds payable and What you are getting (snow blower) |
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