Source: Adapted from Weygandt, Kieso, and Kell, Accounting Principles, Third
Edition, p. 673. ... Computation of Amortization-—Effective Interest Method.
ILLUSTRATION 14-1 INTEREST RATES AND BOND PRICES
Market Interest Rate (1) Stated interest Rate 12%
Bond Issued at
(2) (3)
Bonds Sold At
10%
Premium
12%
Face Value
15%
Discount
Source: Adapted from Weygandt, Kieso, and Kell, Accounting Principles, Third Edition, p. 673.
EXAMPLE: Three year bonds are issued at face value of $100,000 and a stated rate interest of 12%.
(1) Bonds are issued to yield 10%
Present value of principal (Table 6-2) FV ´ (PVF3,10%) = $100,000 ´ .75132 =
$75,132
Present value of interest payments (Table 6-4) R ´ (PVF-OA3,10%) = $12,000 ´ 2.48685 = Selling price of bonds (premium)
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Kieso/Intermediate 9e
29,842
$104,974
101
ILLUSTRATION 14-1 (continued)
(2) Bonds are issued to yield 12%
Present value of principal (Table 6-2) FV ´ (PVF3,12%) = $100,000 ´ .71178 =
$71,178
Present value of interest payments (Table 6-4) R ´ (PVF-OA3,12%) = $12,000 ´ 2.40183 = Selling price of bonds (par)
28,822
$100,000
(3) Bonds are issued to yield 15%
Present value of principal (Table 6-2) FV ´ (PVF3,15%) = $100,000 ´ .65752 =
$65,752
Present value of interest payments (Table 6-4) R ´ (PVF-OA3,15%) = $12,000 ´ 2.28323 = Selling price of bonds (discount)
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Kieso/Intermediate 9e
27,399
$93,151
102
ILLUSTRATION 14-2 BOND AMORTIZATION METHODS
Computation of Amortization-—Straight-Line Method Bond Discount or Premium
Interest Payable
÷
®
Constant Amount
Number of Interest Periods
=
Bond Amortization
+Discount – Premium Amortization
=
Interest Expense
Constant Amount
Constant Amount
Computation of Amortization-—Effective Interest Method Bond Interest Payable Face Amount ´ of Bonds
Stated Interest Rate
Constant Amount
Bonds Interest Expense Carrying Value ´ of Bonds Beginning of Period
–
Effective Interest Rate
Premium-—Decreasing Amount Discount-—Increasing Amount
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Kieso/Intermediate 9e
=
Amortization Amount
Decreasing Amount Increasing Amount
103
ILLUSTRATION 14-3 ACCOUNTING FOR BONDS Three-year bond with an 8% coupon rate sold to yield 10% on January 1, 1997. Interest payable annually on December 31. Callable at 105. Face value: $100,000. Bond issue costs: $5,000. 1. Calculation of premium or discount. $100,000 (0.75132) = $75,132 (Present value of principal, Table 6-2) $ 8,000 (2.48685) = 19,895 (Present value of interest, Table 6-4) $95,027 (Selling price of bond) Discount = $100,000 – $95,027 = $4,973. 2. Recording of bond issuance. Cash………………………………. Bond Issue Costs………………… Discount on Bonds………………… Bonds Payable………………….
90,027 5,000 4,973 100,000
3. Bond Discount Amortization. Interest Interest Pay. (8%) Expense (10%) 01/01/97 12/31/97 12/31/98 12/31/99
8,000 8,000 8,000
9,503 9,653 9,817
Discount Bond Face Val. Amortization Discount of Bonds 4,973 3,470 1,817 –0–
1,503 1,653 1,817
100,000 100,000 100,000 100,000
Car. Val. of Bonds 95,027 96,530 98,183 100,000
4. Accounting entries. 12/31/97 Interest Expense Discount on Bonds Cash
9,503
Bond Issue Expense Bonds Issue Costs
1,667
12/31/98 9,653
1,503 8,000
Bonds Payable Cash
Copyright © 1998 John Wiley & Sons, Inc.
9,817 1,653 8,000
1,667 1,667
12/31/99 1,817 8,000 1,666
1,667
1,666 100,000 100,000
Kieso/Intermediate 9e
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ILLUSTRATION 14-4 (continuation of problem in Illustration 14-3) EXTINGUISHMENT OF DEBT Three year 8% bonds of $100,000 are recalled at 105 on December 31, 1998. Expenses of recall: $2,000.
General ledger account balances at 12/31/98: Bond Issue Cost 1/1/97
Bal. 12/31/98
$5,000
12/31/97 12/31/98
Bonds Payable $1,667 1,667
12/31/98 $100,000
$1,666
Discount on Bonds Payable 1/1/97
Bal. 12/31/98
$4,973
12/31/97 12/31/98
$1,503 1,653
$1,817
ANALYSIS: Cash paid Net carrying amount of bonds Loss on extinguishment
= (1.05 ´ $100,000) + $2,000 = $107,000. = ($100,000 – $1,817 – $1,666) = $96,517. = $107,000 – $96,517 = $10,483.
JOURNAL ENTRY: Bonds Payable………………………………………………… Loss on Extinguishment……………………………………… Cash………………………………………………………. Discount on Bonds………………………………………. Bond Issue Costs…………………………………………
Copyright © 1998 John Wiley & Sons, Inc.
Kieso/Intermediate 9e
100,000 10,483 107,000 1,817 1,666
105
ILLUSTRATION 14-5 SUMMARY OF ACCOUNTING FOR TROUBLED DEBT
EVENT
DEBTOR
CREDITOR
1. Impairment
No recognition
Loss based upon difference between PV of future cash flows discounted at historical effective interest rate and carrying amount of note. Recognize interest revenue (or bad debt expense reduction) based upon new carrying amount and original effective rate.
Recognize gain on restructure and gain or loss on asset transfer. Recognize gain on restructure.
Recognize loss on restructure.
2. Restructuring-— Settlement of Debt (a) Transfer of noncash assets. (b) Granting of equity interest. 3. Restructuring-— Modification of Terms (a) Carrying amount of debt < future cash flows
(b) Carrying amount of debt > future cash flows
Recognize no gain on restructure. Determine new effective interest rate to be used in recording interest expense.
Recognize loss on restructure.
For both situations: Recognize loss based upon PV of restructured cash flows. Recognize interest revenue based upon new recorded value and original effective rate.
Recognize gain on restructure and reduce carrying amount to the sum of the undiscounted cash flows. Recognize no interest expense over the remaining life of the debt.
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