principle of accounting lecture 1 .pdf how
and the allowance for doubtful account & depreciation and impairment
1. Accounts receivable are amounts owed by customers on account. Companies generally expect to collect these receivables within 30 to 60 days.
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1. Corporation 5
Illustration 1: Assume that Acropolis Company on January 1, 2017, issues $100,000 of 9% bonds, due in
five years, with interest payable annually at year-end.
The purchaser of the bonds would receive the following two types of cash payments:
(1) principal of $100,000 to be paid at maturity, and
(2) five $9,000 interest payments ($100,000 x 9%) over the term of the bonds.
Required:- determine the issue price (selling price)
Solution
The current market price of a bond is equal to the present value of all the future cash payments promised
by the bond.
Present value of the principal
Principle x P.V. $1 (n= 5 i= 9%)
100,000 x 0.6499
+ Present value of the interest payments
interest x P.V. A (n= 5 i= 9%)
9,000 x 3.8897
64,993
35,007
Present value (selling price) of the bonds 100,000
4. Corporation 8
Example:-
On January 1, 2012, Masterwear Industries issued $700,000 of 12% bonds. Interest $42,000 is
payable semiannually on January 1 and July 1.
The bonds mature in three years (an unrealistically short maturity to shorten the illustration).
The entire bond issue was sold in a private placement to United Intergroup at the principal
amount
Solution
Masterwear (Issuer) United (Investor)
At
issuance
(Jan. 1)
Cash
Bond payable
700,000
700,000
Investment in bonds
Cash
700,000
700,000
July 1, Bond interest expense
Cash
42,000
42,000
Cash
interest revenue
42,000
42,000
Dec. 31, interest expense
interest payable
42,000
42,000
interest receivable
interest revenue
42,000
42,000
,
Bond contractual
interet rate
(10%)
1- The market rate
is
8%
Bonds sold at
Premium.
2- The market rate
is
10%
Bonds sold at Face
value.
3- The market rate
is
12%
Bonds sold at
Discount
5. Corporation 9
Bonds issued between interest dates:
assume Masterwear was unable to sell the bonds in the previous example until March I-two months after
they are dated. This variation is shown in Illustration United would pay the price of the bonds $700,000
plus $14,000 accrued interest
Interest for March 1 = 700,000 x
12
12
𝑥
2
12
= 14,000
Masterwear (Issuer) United (Investor)
Cash
Bonds payable
interest payable
714,000
700,000
14,000
Investment in bonds
Interest receivable
Cash
700,000
14000
714,000
At the first interest date
interest expense
Interest payable
Cash
28,000
14,000
42,000
Cash
interest revenue
Interest receivable
42,000
28,000
14,000
Bonds Issued at a Discount
Example:-
Evermaster Corporation issued $100,000 of 8 percent term bonds on January 1, 2020, due on
January 1, 2025, with interest payable each July 1 and January 1.
the investors required an effective-interest rate of 10 percent
solution
Maturity value of bonds payable 100,000
Present value of principle
Principle x P.V. $1 (n=10 i=5%)
100,000 X 0.61391
Present value of interest payable
Interest x P.V.O.A (n=10 i=5%)
(100000 x 8% x 6/12) = 4000 X 7.72173
61,391
30,887
proceeds from sale of bonds 92,278
= Discount on bonds payable 7,722
6. Corporation 10
Schedule of Bond Discount Amortization
Effective Interest Method- Semiannual Interest Payments
5 year, 8% bonds to yield 10%
Date Cash
Paid
Interest
Expense
Discount
Amortized
Carrying
amount
of Bonds
1/1/20 92,278
7/1/20 4000a 4614b 614c 92,892d
1/1/21 4000 4645 645 93,537
7/1/21 4000 4677 677 94,214
1/1/22 4000 4711 711 94,925
7/1/22 4000 4746 746 95,671
1/1/23 4000 4783 783 96,454
7/1/23 4000 4823 823 97,277
1/1/24 4000 4864 864 98,141
7/1/24 4000 4907 907 99,048
1/1/25 4000 4952 952 100,000
Masterwear (Issuer) United (Investor)
(Jan. 1) Cash
Discount on bonds pay.
Bond payable
92278
7722
100,000
Investment in bonds
Discount in bond invest
Cash
100,000
7722
92278
July 1, interest expense
discount on bond
Cash
4614
614
4000
Cash
Discount on bond invest
interest revenue
4000
614
4614
July 1, interest expense
discount on bond
interest payable
4645
614
645
Interest receivable
Discount on bond invest
interest revenue
4000
645
4645