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Paraphin [41]
3 years ago
8

Cash interest is computed annually when a bond is issued for other than its face value. For a bond issued at a premium, how will

this component change under the effective interest method as the bond approaches maturity?
Business
1 answer:
sergeinik [125]3 years ago
7 0

Answer:

Under the effective interest method, as a bond approaches maturity, the interest expense decreases while the amortization of the bond premium increases.

Explanation:

E.g. a company issues $800,000 in 8% bonds when the market rate is 7%, so the bonds price is $856,850 (semiannual coupons are paid).

Journal entry to record the issuance

Dr Cash 856,850

    Cr Bonds payable 800,000

   Cr Premium on bonds payable 56,850

amortization of bond premium on first coupon payment:

($856,850 x 3.5%) - ($800,000 x 4%) = $29,989.75 - $32,000 = -$2,010.25 ≈ -$2,010

Journal entry to record first coupon payment:

Dr Interest expense 29,990

Dr Premium on bonds payable 2,010

    Cr Cash 32,000

amortization of bond premium on second coupon payment:

($854,840 x 3.5%) - ($800,000 x 4%) = $29,919.40 - $32,000 = -$2,080.60 ≈ -$2,081

Journal entry to record second coupon payment:

Dr Interest expense 29,919

Dr Premium on bonds payable 2,081

    Cr Cash 32,000

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Answer and Explanation:

The Journal entries are shown below:-

Interest expense Dr, $316,800

Premium on bonds payable Dr, $19,200 ($96,000 ÷ 5)

            To Interest payable $336,000    ($4,800,000 × 7%)

(Being interest expense and bond premium amortization is recorded)

Here we debited the interest expenses and premium on bonds as it increased the expenses and we credited the interest payable as it also increased the liabilities

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Economics is the study of how individuals and societies make choices under the condition of scarcity.

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Allocating Joint Costs Using the Net Realizable Value Method
Ilya [14]

Answer:

Allocating Joint Costs Using the Net Realizable Value Method

1. Joint Cost

Grades Allocation

L-Ten   $1,850

Triol      6,569

Pioze     3,881

Total $12,300

2. Joint Cost

Grades Allocation

L-Ten   $2,112

Triol      5,756

Pioze    4,432

Total $12,300

Explanation:

a) Data and Calculations:

Cost of each production run = $12,300

Product    Gallons  Further Processing     Eventual Market   Net Realizable

                                Cost per Gallon          Price per Gallon         Value

L-Ten          3,200              $0.70                       $2.10                $4,480

Triol            3,700                  1.10                         5.40                 15,910

Pioze         2,000                  1.50                        6.20                  9,400

Total          8,900                                                                      $29,790

Allocation of join cost:

L-Ten = $4,480/$29,790 * $12,300 = $1,850

Triol = $15,910/$29,790 * $12,300 = $6,569

Pioze = $9,400/$29,790 * $12,300 = $3,881

Product    Gallons  Further Processing     Eventual Market   Net Realizable

                                Cost per Gallon          Price per Gallon         Value

L-Ten          3,200              $0.70                       $2.10                $4,480

Triol            3,700                 2.10                         5.40                 12,210

Pioze         2,000                  1.50                        6.20                  9,400

Total          8,900                                                                      $26,090

Allocation of join cost:

L-Ten = $4,480/$26,090 * $12,300 = $2,112

Triol = $12,210/$26,090 * $12,300 = $5,756

Pioze = $9,400/$26,090 * $12,300 = $4,432

7 0
3 years ago
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