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On January 1, Year 1, a $100,000 bond with a 5% annual stated rate is issued at 94 to yield an effective rate of 7%. Interest payments are made each December 31. If the effective interest method is applied, how much interest expense is recognized in Year 1?
Interest expense is calculated by taking the beginning period carrying value by the yield rate. A $100K bond issued at 94 has a beginning carrying value of $94K. Thus, the interest expense for Year 1 is $94K x 7%.
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On January 2, Year 1, Beanstock Corporation offers to sell a $100,000 bond coming due in 10 years. The bond pays interest of 4% at the end of each year. Beanstock finds a buyer who wants to earn 7% each year, and agrees to the 7% rate at a sales price of $80,000. On the December 31, Year 1 balance sheet, what amount is reported for the liability of this bond?
The beginning carrying value of the bond is its purchase price of $80K. Interest expense for Year 1 is the carrying value of $80K x the yield rate of 7% = $5,600. The carrying value of the bond increases by the amount of the interest expense to $85,600.
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A $100,000 bond payable is issued on July 1, Year 2, at 106. The bond comes due in exactly 5 years. The bond pays interest of 10% per year with payments every January 1st and July 1st. If the straight-line method is used, what amount should be reported for the liability as of December 31, Year 2?
Under the straight line method, the difference between the carrying value and the face value is amortized evenly over the life of the bond. Here, the premium of $6K is amortized evenly over 5 years, at $1,200 per year. 6 months have gone by since the sale of the bond, so the carrying value of $106K is reduced by $600 ($1,200 x 6/12 months).
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Of the following which is a cost associated with exit and disposal activities?
Costs to relocate employees are costs associated with exit and disposal activities.
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Which of the following is generally associated with payables classified as A/P? A) Periodic payment of interest B) Secured by collateral
Neither are generally associated with payables classified as A/P. A liability that is secured by collateral should be classified as a loan payable.
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The process of accounting for a discount or premium on bonds until their maturity is known as:
Bonds will likely demonstrate issuance at a discount or premium, and the process of returning the bond to its original value is known as amortization.
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