OMG its a BOND!

posted Feb 11, 2010, 2:43 PM by Prof Kiernan
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:
 Present Value of $1 for # periods at #%              # 
 times Face value
 x         #
 
 Present value of face amount due in 5 years
        $ #          $ #
 Present Value of annuity of $1 for # periods at #%              #  
 times interest payment
 x       $  #
 
 Present value of 10 interest payments
           $ # +    $ #
Total Value of Bonds (Cash value)
        $ #


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:
 Present Value of $1 for 10 periods at 6.5%              0.53273 
 times Face value
 x       $ 10,000
 
 Present value of face amount due in 5 years
          $ 5327.3          $ 5327.3
 Present Value of annuity of $1 for 10 periods at 6.5%           7.18883  
 times interest payment
 x           $  600
 
 Present value of 10 interest payments
        $ 4313.298 +    $ 4313.298
Total Value of Bonds (Cash value)
        $ 9640.598


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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