分析案例教案

10

Liabilities

LearningObjectives

10-3

Afterstudyingthischapter,youshouldbeableto:

Exinacurrentliability,andidentifythemajortypesofcurrent

liabilities.

Describetheaccountingfornotespayable.

Exintheaccountingforothercurrentliabilities.

Exinwhybondsareissued,andidentifythetypesofbonds.

Preparetheentriesfortheissuanceofbondsandinterestexpense.

Describetheentrieswhenbondsareredeemedorconverted.

Describetheaccountingforlong-termnotespayable.

Identifythemethodsforthepresentationandysisoflong-termliabilities.

CurrentLiabilities

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Acurrentliabilityisdebtthata

expectstopaywithinoneyearor

theoperatingcycle,whicheverislonger.

Currentliabilitiesincludenotespayable,accountspayable,unearnedrevenues,andaccruedliabilitiessuchastaxespayable,salariesandwagespayable,andinterestpayable.

Question

Tobeclassifiedasacurrentliability,adebtmustbeexpectedtobepaidwithin:

oneyear.

theoperatingcycle.

2years.

(a)or(b),whicheverislonger

10

Liabilities

LearningObjectives

Afterstudyingthischapter,youshouldbeableto:

Exinacurrentliability,andidentifythemajortypesofcurrentliabilities.

Describetheaccountingfornotespayable.

Exintheaccountingforothercurrentliabilities.

Exinwhybondsareissued,andidentifythetypesofbonds.

Preparetheentriesfortheissuanceofbondsandinterestexpense.

Describetheentrieswhenbondsareredeemedorconverted.

Describetheaccountingforlong-termnotespayable.

Identifythemethodsforthepresentationandysisoflong-term

liabilities.

10-6

CurrentLiabilities

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10

NotesPayable

Writtenpromissorynote.

Frequentlyissuedtomeetshort-termfinancingneeds.

Requirestheborrowertopayinterest.

Issuedforvaryingperiods.

Illustration:FirstNationa agreestolend$100,000onSeptember1,2015,ifColeWilliamsCo.signsa$100,000,12%,four-monthnotematuringonJanuary1.

Instructions

PreparetheentryonSeptember1st.

PreparetheadjustingentryonDecember31st,assumingmonthlyadjustingentrieshavenotbeenmade.

PreparetheentryrequiredonJanuary1,2016,the

maturitydate.

Illustration:FirstNationa agreestolend$100,000onSeptember1,2015,ifColeWilliamsCo.signsa$100,000,12%,four-monthnotematuringonJanuary1.

PreparetheentryonSeptember1st.

Cash 100,000

NotesPayable 100,000

PreparetheadjustingentryonDecember31st.InterestExpense 4,000

InterestPayable 4,000

$100,000x12%x4/12=$4,000

Illustration:FirstNationa agreestolend$100,000onSeptember1,2015,ifColeWilliamsCo.signsa$100,000,12%,four-monthnotematuringonJanuary1,2016.

c) Preparetheentryatmaturity.

NotesPayable

100,000

InterestPayable

Cash

4,000

104,000

10

Liabilities

LearningObjectives

Afterstudyingthischapter,youshouldbeableto:

Exinacurrentliability,andidentifythemajortypesofcurrentliabilities.

Describetheaccountingfornotespayable.

Exintheaccountingforothercurrentliabilities.

Exinwhybondsareissued,andidentifythetypesofbonds.

Preparetheentriesfortheissuanceofbondsandinterestexpense.

Describetheentrieswhenbondsareredeemedorconverted.

Describetheaccountingforlong-termnotespayable.

Identifythemethodsforthepresentationandysisoflong-term

liabilities.

10-11

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CurrentLiabilities

SalesTaxesPayable

Salestaxesareexpressedasastatedpercentageofthesalesprice.

Selling (retailer)

collectstaxfromthecustomer.

enterstaxsepara yincashregisterorincludesin

totalreceipts.

remitsthecollectionstothestate’sdepartmentofrevenue.

SalesTaxesPayable

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Illustration:TheMarch25cashregisterreadingforCooleyGroceryshowssalesof$10,000andsalestaxesof$600(salestaxrateof6%),thejournalentryis:

Mar.25

Cash 10,600

SalesRevenue 10,000

SalesTaxPayable 600

Sometimescompaniesdonotentersalestaxessepara yin

thecashregister.

Illustration:CooleyGroceryenterstotalreceiptsof$10,600.Becausetheamountreceivedfromthesaleisequaltothesalesprice100%plus6%ofsales,(salestaxrateof6%),thejournalentryis:

Mar.25

Cash 10,600

Salesrevenue 10,000*

Salestaxpayable 600

*$10,600÷1.06=$10,000

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AccountingforCurrentLiabilities

PayrollandPayrollTaxesPayable

Theterm“payroll”pertainstoboth:

Salaries-managerial,administrative,andsales nel

(monthlyoryearlyrate).

Wages-storeclerks,factoryemployees,andmanuallaborers(rateperhour).

Determiningthepayrollinvolvescomputingthreeamounts:

(1)grossearnings,(2)payrolldeductions,and(3)netpay.

PayrollandPayrollTaxesPayable

10-16

Illustration10-2

Payrolldeductions

LO3

PayrollandPayrollTaxesPayable

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Illustration:AssumeCargoCorporationrecordsitspayrollforthe

weekofMarch7asfollows:

SalariesandWage pense 100,000

FICATaxesPayable 7,650

Federal eTaxesPayable 21,864State eTaxesPayable 2,922

SalariesandWagesPayable 67,564

RecordthepaymentofthispayrollonMarch7.

SalariesandWagesPayable 67,564

Cash 67,564

Payrolltaxexpenseresultsfromadditionaltaxesthat

ernmentalagencieslevyonemployers.

Thesetaxesare:

Employer’sshareofSocialSecurity(FICA)taxes

Federalunemploymenttaxes

Stateunemploymenttaxes

Illustration:BasedonCargoCorp.’s$100,000payroll,

the wouldrecordtheemployer’penseandliability

forthesepayrolltaxesasfollows.

PayrollTaxExpense 13,850

FICATaxesPayable

7,650

StateUnemploymentTaxesPayable

800

FederalUnemploymentTaxesPayable

5,400

Question

Employerpayrolltaxesdonotinclude:

Federalunemploymenttaxes.

Stateunemploymenttaxes.

Federal etaxes.

FICAtaxes.

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Advanceslideinpresentationmodetorevealmissingcontrols.

ANATOMYOFAFRAUD

Artwasacustodialsupervisorforalargeschooldistrict.Thedistrictwassupposedtoemploybetween35and40regularcustodians,aswellas3or4substitutecustodianstofillinwhenregularcustodianswereabsent.Instead,inadditiontotheregularcustodians,Art“hired”77substitutes.Infact,almostnoneofthesepeopleworkedforthedistrict.

Instead,Artsubmittedtimecardsforthesepeople,collectedtheirchecksatthedistrictoffice,and allydistributedthecheckstothe“employees.”Ifasubstitute’scheckwasfor$1,200,that wouldcashthecheck,keep$200,andpayArt$1,000.

Totaltake:$150,000

THEMISSINGCONTROLS

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AccountingforCurrentLiabilities

UnearnedRevenue

Revenuesreceivedbeforethe

deliversgoodsor

providesservices.

Illustration10-3Unearnedrevenueandrevenueaccounts

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UnearnedRevenue

Illustration:SuperiorUniversitysells10,000seasonfootballticketsat$50eachforitsfive-gamehomeschedule.Theentryforthesaleofseasonticketsis:

Aug.6

Cash 500,000

UnearnedTicketRevenue 500,000

Aseachgameiscompleted,Superiorrecordstherecognitionofrevenuewiththefollowingentry.

Sept.7

UnearnedTicketRevenue 100,000

TicketRevenue 100,000

AccountingforCurrentLiabilities

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CurrentMaturitiesofLong-TermDebt

Portionoflong-termdebtthatcomesdueinthecurrentyear.

Noadjustingentryrequired.

Illustration:WendyConstructionissuesafive-year,interest-bearing

$25,000noteonJanuary1,2014.ThisnotespecifiesthateachJanuary1,startingJanuary1,2015,Wendyshouldpay$5,000ofthenote.WhenthepreparesfinancialstatementsonDecember31,2014,

Whatamountshouldbereportedasacurrentliability?

Whatamountshouldbereportedasalong-termliability?

$5,000

$20,000

AccountingforCurrentLiabilities

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StatementPresentationand

ysis

Illustration10-4

Balancesheetpresentationofcurrentliabilities

StatementPresentationand

ysis

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Question

Workingcapitaliscalculatedas:

currentassetsminuscurrentliabilities.

totalassetsminustotalliabilities.

long-termliabilitiesminuscurrentliabilities.

both(b)and(c).

ysis

Liquidityreferstotheabilitytopaymaturingobligationsandmeetunexpectedneedsforcash.

Illustration10-5

Currentratiopermitsustocomparetheliquidityofdifferent-sizedcompaniesandofasingle at

differenttimes.

Illustration10-6

10

Liabilities

LearningObjectives

Afterstudyingthischapter,youshouldbeableto:

Exinacurrentliability,andidentifythemajortypesofcurrentliabilities.

Describetheaccountingfornotespayable.

Exintheaccountingforothercurrentliabilities.

Exinwhybondsareissued,andidentifythetypesofbonds.

Preparetheentriesfortheissuanceofbondsandinterestexpense.

Describetheentrieswhenbondsareredeemedorconverted.

Describetheaccountingforlong-termnotespayable.

Identifythemethodsforthepresentationandysisoflong-term

liabilities.

10-28

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Long-TermLiabilities

Long-termliabilitiesareobligationsthatareexpectedtobe

paidafteroneyear.

BondBasics

Bondsareaformofinterest-bearingnotespayable.

Threeadvantagesovercommonstock:

HelpfulHint

Besidescorporations,

ernmentalagenciesanduniversitiesalsoissuebondstoraisecapital.

Stockholdercontrolisnotaffected.

Taxsavingsresult.

Returnoncommonstockholders’equitymaybehigher.

BondBasics

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Effectsonearningspershare—stocksvs.bonds.

Illustration10-8

Question

Majordisadvantagesresultingfromtheuseofbondsare:

thatinterestisnottaxdeductibleandtheprincipalmustberepaid.

thattheprincipalistaxdeductibleandinterestmustbepaid.

thatneitherinterestnorprincipalistaxdeductible.

thatinterestmustbepaidandprincipalrepaid.

BondBasics

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TypesofBonds

BondBasics

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IssuingProcedures

Sta awsgrantcorporationsthepowertoissuebonds.

Boardofdirectorsandstockholdersmustapprovebondissues.

Boardofdirectorsmuststipulatenumberofbondstobeauthorized,totalfacevalue,andcontractualinterestrate.

Bondtermssetforthinlegal knownasabond

indenture.

Bond,typicallya$1,000facevalue.

IssuingProcedures

Representsapromisetopay:

sumofmoneyatdesignatedmaturitydate,plus

periodicinterest ontractual(stated)rateonthematurityamount(facevalue).

Interestpaymentsusuallymadesemiannually.

Issuedtoobtainlargeamountsoflong-termcapital.

Investment sellsthebondsfortheissuing

.

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BondBasics

Illustration10-9

Bond

BondBasics

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BondTrading

Bondholderscanselltheirbondsonnationalexchanges.

Bondpricesarequotedasapercentageofthefacevalue.

Aquotedpriceof97means97%offacevalue.

Illustration10-10

Marketinformationforbonds

Co.hasoutstanding5.125%,$1,000bondsthatmaturein2014.Theycurrentlyyielda5.747%return.Onthisday,$33,965,000ofthesebondsweretraded.Atthecloseoftrading,thepricewas96.595%offacevalue,or$965.95.

DeterminingtheMarketValueofaBond

Currentmarketprice(presentvalue)isafunctionofthethree

factors:

dollaramountstobereceived,

lengthoftimeuntiltheamountsarereceived,and

marketrateofinterest.

Themarketinterestrateistherateinvestorsdemandforloaningfunds.

10-38 LO4

10

Liabilities

LearningObjectives

Afterstudyingthischapter,youshouldbeableto:

Exinacurrentliability,andidentifythemajortypesofcurrentliabilities.

Describetheaccountingfornotespayable.

Exintheaccountingforothercurrentliabilities.

Exinwhybondsareissued,andidentifythetypesofbonds.

Preparetheentriesfortheissuanceofbondsandinterestexpense.

Describetheentrieswhenbondsareredeemedorconverted.

Describetheaccountingforlong-termnotespayable.

Identifythemethodsforthepresentationandysisoflong-term

liabilities.

10-39

AccountingforBondIssues

LO5

10-40

Corporationrecordsbondtransactionswhenit

issues(sells),

redeems(buysback)bonds,and

whenbondholdersconvertbondsintocommonstock.

NOTE:Ifbondholdersselltheirbondinvestmentstootherinvestors,theissuing receivesnofurthermoneyonthetransaction,nordoestheissuing journalizethetransaction.

AccountingforBondIssues

Advanceslideinpresentationmodetoreveal“BondsSellat.”

LO5

10-41

BondContractualInterestRate10%

IssueatFaceValue,Discount,orPremium?

Illustration10-11

Interestratesandbondprices

AccountingforBondIssues

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Question

Therateofinterestinvestorsdemandforloaningfundstoacorporationisthe:

contractualinterestrate.

facevaluerate.

marketinterestrate.

statedinterestrate.

Question

KarsonInc.issues10-yearbondswithamaturityvalueof$200,000.Ifthebondsareissuedatapremium,thisindicatesthat:

thecontractualinterestrateexceedsthemarketinterestrate.

themarketinterestrateexceedsthecontractualinterestrate.

thecontractualinterestrateandthemarketinterestratearethesame.

norelationshipexistsbetweenthetworates.

IssuingBondsatFaceValue

Illustration:OnJanuary1,2015,Candlestick,Inc.issues

$100,000,five-year,10%bondsat100(100%offacevalue).Theentrytorecordthesaleis:

Jan.1 Cash 100,000

BondsPayable 100,000

Illustration:OnJanuary1,2015,Candlestick,Inc.issues

$100,000,five-year,10%bondsat100(100%offacevalue).AssumethatinterestispayablesemiannuallyonJanuary1andJuly1.PreparetheentrytorecordthepaymentofinterestonJuly1,2015,assumenopreviousaccrual.

July1 InterestExpense 5,000

Cash 5,000

Illustration:OnJanuary1,2015,Candlestick,Inc.issues

$100,000,five-year,10%bondsat100(100%offacevalue).AssumethatinterestispayablesemiannuallyonJanuary1andJuly1.PreparetheentrytorecordtheaccrualofinterestonDecember31,2015,assumenopreviousaccrual.

Dec.31 InterestExpense 5,000

InterestPayable 5,000

IssuingBondsataDiscount

Illustration:OnJanuary1,2015,Candlestick,Inc.sells$100,000,five-year,10%bondsfor

$92,639(92.639%offacevalue).InterestispayableonJuly1andJanuary1.Theentrytorecordtheissuanceis:

Jan.1 Cash 92,639

DiscountonBondsPayable 7,361

BondsPayable 100,000

IssuingBondsataDiscount

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StatementPresentation

Illustration10-12Statementpresentationofdiscountonbondspayable

Saleofbondsbelowfacevalue(discount)=totalcostofborrowing>interestpaid.

Reason:Borrowerisrequiredtopaythebonddiscountatthematuritydate.Therefore,thebonddiscountisconsideredtobeaincreaseinthecostofborrowing.

Illustration10-14

TotalCostofBorrowing

Illustration10-13

OR

Question

DiscountonBondsPayable:

hasacreditbalance.

isacontraaccount.

isaddedtobondspayableonthebalancesheet.

increasesoverthetermofthebonds.

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AccountingforBondIssues

IssuingBondsataPremium

Illustration:OnJanuary1,2015,Candlestick,Inc.sells$100,000,five-year,10%bondsfor

$108,111(108.111%offacevalue).InterestispayableonJuly1andJanuary1.Theentrytorecordtheissuanceis:

Jan.1 Cash 108,111

BondsPayable 100,000

PremiumonBondsPayable 8,111

IssuingBondsataPremium

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StatementPresentation

Illustration10-15Statementpresentationofdiscountonbondspayable

Saleofbondsabovefacevalue(premium)=totalcostofborrowing<interestpaid.

Reason:Borrowerisnotrequiredtopaythebondpremiumatthematuritydateofthebonds.Therefore,thebondpremiumisconsideredtobeareductioninthecostofborrowing.

Illustration10-17

TotalCostofBorrowing

Illustration10-16

OR

10

Liabilities

LearningObjectives

Afterstudyingthischapter,youshouldbeableto:

Exinacurrentliability,andidentifythemajortypesofcurrentliabilities.

Describetheaccountingfornotespayable.

Exintheaccountingforothercurrentliabilities.

Exinwhybondsareissued,andidentifythetypesofbonds.

Preparetheentriesfortheissuanceofbondsandinterestexpense.

Describetheentrieswhenbondsareredeemedorconverted.

Describetheaccountingforlong-termnotespayable.

Identifythemethodsforthepresentationandysisoflong-term

liabilities.

10-54

AccountingforBondRedemptions

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RedeemingBondsatMaturity

Assumingthatthe paysandrecordssepara ytheinterestforthelastinterestperiod,Candlestickrecordstheredemptionofitsbondsatmaturityasfollows:

Jan.1 BondsPayable 100,000

Cash 100,000

RedeemingBondsBeforeMaturity

Whenbondsareredeemedbeforematurity,itisnecessaryto:

eliminatecarryingvalueofbondsatredemptiondate;

recordcashpaid;and

recognizegainorlossonredemption.

Thecarryingvalueofthebondsisthefacevalueofthebondslessany

remainingbonddiscountorplusanyremainingbondpremiumattheredemptiondate.

Question

Whenbondsareredeemedbeforematurity,thegainorlossonredemptionisthedifferencebetweenthecashpaidandthe:

carryingvalueofthebonds.

facevalueofthebonds.

originalsellingpriceofthebonds.

maturityvalueofthebonds.

Illustration:AssumeCandlestick,Inc.hassolditsbondsatapremium.At oftheeighthperiod,Candlestickretiresthesebondsat103afterpayingthesemiannualinterest.Thecarryingvalueofthebondsattheredemptiondateis$101,623.Candlestickmakesthefollowingentrytorecordtheredemptionat oftheeighthinterestperiod(January1,2019):

Jan.1

BondsPayable

100,000

PremiumonBondsPayable

1,623

LossonBondRedemption

1,377

Cash

103,000

ConvertingBondsintoCommonStock

Untilconversion,thebondholderreceivesinterestonthebond.

Fortheissuer,thebondssellatahigherpriceandpayalowerrateofinterestthancomparabledebtsecuritieswithouttheconversionoption.

Uponconversion,the transfersthecarryingvalueofthebondstopaid-incapitalaccounts.Nogainorlossisrecognized.

Illustration: OnJuly1,SaundersAssociatesconverts$100,000bondssoldatfacevalueinto2,000sharesof$10parvaluecommonstock.Boththebondsandthecommonstockhaveamarketvalueof$130,000.Saundersmakesthefollowingentrytorecordtheconversion:

July1 BondsPayable 100,000

CommonStock(2,000x$10) 20,000

Paid-inCapitalinExcessofPar 80,000

Question

Whenbondsareconvertedintocommonstock:

againorlossisrecognized.

thecarryingvalueofthebondsistransferredtopaid-incapitalaccounts.

themarketpriceofthestockisconsideredintheentry.

themarketpriceofthebondsistransferredtopaid-incapital.

10

Liabilities

LearningObjectives

Afterstudyingthischapter,youshouldbeableto:

Exinacurrentliability,andidentifythemajortypesofcurrentliabilities.

Describetheaccountingfornotespayable.

Exintheaccountingforothercurrentliabilities.

Exinwhybondsareissued,andidentifythetypesofbonds.

Preparetheentriesfortheissuanceofbondsandinterestexpense.

Describetheentrieswhenbondsareredeemedorconverted.

Describetheaccountingforlong-termnotespayable.

Identifythemethodsforthepresentationandysisoflong-term

liabilities.

10-62

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Long-TermLiabilities

AccountingforLong-TermNotesPayable

Maybesecuredbyamortgagethatpledgestitletospecificassetsassecurityforaloan.

Typically,thetermsrequiretheborrowertomakeinstallmentpaymentsoverthetermoftheloan.Eachpaymentconsistsof

interestontheunpaidbalanceoftheloanand

areductionofloanprincipal.

Companiesinitiallyrecordmortgagenotespayableatfacevalue.

AccountingforLong-TermNotesPayable

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Illustration:PorterTechnologyInc.issuesa$500,000,12%,20-yearmortgagenoteonDecember31,2015.Thetermsprovideforsemiannualinstallmentpaymentsof$33,231(notincludingreal

estatetaxesandinsurance).

Illustration10-18

Mortgageinstallmentpaymentschedule

Illustration:PorterTechnologyInc.issuesa$500,000,12%,20-yearmortgagenoteonDecember31,2015.Thetermsprovideforsemiannualinstallmentpaymentsof$33,231(notincludingrealestatetaxesandinsurance).Preparetheentriestorecordthemortgageandfirstpayment.

Dec.31 Cash 500,000

MortgagePayable 500,000

Jun.30 InterestExpense 30,000

MortgagePayable 3,231

Cash 33,231

Question

Eachpaymentonamortgagenotepayableconsistsof:

interestontheoriginalbalanceoftheloan.

reductionofloanprincipalonly.

interestontheoriginalbalanceoftheloanandreductionofloanprincipal.

interestontheunpaidbalanceoftheloanandreductionofloanprincipal.

10-67 LO7

10

Liabilities

LearningObjectives

Afterstudyingthischapter,youshouldbeableto:

Exinacurrentliability,andidentifythemajortypesofcurrentliabilities.

Describetheaccountingfornotespayable.

Exintheaccountingforothercurrentliabilities.

Exinwhybondsareissued,andidentifythetypesofbonds.

Preparetheentriesfortheissuanceofbondsandinterestexpense.

Describetheentrieswhenbondsareredeemedorconverted.

Describetheaccountingforlong-termnotespayable.

Identifythemethodsforthepresentationandysisoflong-term

liabilities.

10-68

StatementPresentationand

ysis

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Presentation

Illustration10-19

Balancesheetpresentationoflong-termliabilities

Companiesreportthecurrentmaturitiesoflong-termdebtundercurrentliabilitiesiftheyaretobepaidwithinoneyearortheoperatingcycle,whicheverislonger.

ysis

Tworatiosthatprovideinformationlong-runsolvencyandthe

abilitytomeetinterestpaymentsastheycomedueare:

DebttoAssetsRatio

TimesInterestEarned

ysis

Illustration:Kelloggreportedtotalliabilitiesof$8,925million,totalassetsof$11,200million,interestexpenseof$295million,

etaxesof$476million,andnet eof$1,208million.

Illustration10-20

Debttoassetsratio

Thehigherthepercentageofdebttoassets,thegreatertheriskthatthe maybeunabletomeetitsmaturingobligations.

ysis

Illustration:Kelloggreportedtotalliabilitiesof$8,925million,totalassetsof$11,200million,interestexpenseof$295million,

etaxesof$476million,andnet eof$1,208million.

Illustration10-21Timesinterestearned

Timesinterestearnedindicatesthe ’sabilitytomeetinterestpaymentsastheycomedue.

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APPENDIX

10A

PresentValueConcepts

LO9Computethemarketpriceofabond.

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PresentValueofaSingleAmount

Illustration:Assumethatyouarewillingtoinvestasumofmoneythatwillyield$1,000at ofoneyear,andyoucanearn10%onyourmoney.Whatisthe$1,000worthtoday?

Tocomputetheanswer,

dividethefutureamountby1plustheinterestrate ($1,000÷

1.10=$909.09 OR

useaPresentValueof1table.($1,000X.90909)=$909.09

(10%perperiod,oneperiodfromnow).

APPENDIX

10A

PresentValueConcepts

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Tocomputetheanswer,

dividethefutureamountby1plustheinterestrate($1,000÷1.10=$909.09.

Illustration10A-1

Tocomputetheanswer,

useaPresentValueof1table.($1,000X.90909)=

$909.09(10%perperiod,oneperiodfromnow).

Thefutureamount($1,000),theinterestrate(10%),andthe

numberofperiods(1)areknown

Illustration10A-2Findingpresentvalueifdiscountedforoneperiod

Ifyouaretoreceivethesinglefutureamountof$1,000in

twoyears,discountedat10%,itspresentvalueis$826.45

[($1,000÷1.10)÷1.10].

Illustration10A-3Findingpresentvalueifdiscountedfortwoperiods

TocomputetheanswerusingaPresentValueof1table.($1,000X.82645)=$826.45(10%perperiod,twoperiodsfromnow).

PresentValueofInterestPayments(Annuities)

Inadditiontoreceivingthefacevalueofabondatmaturity,aninvestoralsoreceivesperiodicinterestpayments(annuities)overthelifeofthebonds.

Tocomputethepresentvalueofanannuity,weneedtoknow:

interestrate,

numberofinterestperiods,and

amountoftheperiodicreceiptsorpayments.

Assumethatyouwillreceive$1,000cashannuallyforthree

yearsandtheinterestrateis10%.

Illustration10A-5Timediagramforathree-yearannuity

Assumethatyouwillreceive$1,000cashannuallyforthree

yearsandtheinterestrateis10%.

Illustration10A-6Presentvalueofaseriesoffuturecomputations

APPENDIX

10A

PresentValueConcepts

Assumethatyouwillreceive$1,000cashannuallyforthree

yearsandtheinterestrateis10%.

10-83

$1,000annualpaymentx2.48685=$2,486.85

DifferenceinPVfactorfromslide10-82isduetorounding.

LO9

APPENDIX

10A

PresentValueConcepts

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ComputingthePresentValueofaBond

Sellingpriceofabondisequaltothesumof:

Presentvalueofthefacevalueofthebonddiscountedattheinvestor’srequiredrateofreturn.

PLUS

Presentvalueoftheperiodicinterestpaymentsdiscountedattheinvestor’srequiredrateofreturn.

Assumeabondissueof10%,five-yearbondswithafacevalue

of$100,000withinterestpayablesemiannuallyonJanuary1

andJuly1.

Illustration10A-8

Assumeabondissueof10%,five-yearbondswithafacevalueof$100,000withinterestpayablesemiannuallyonJanuary1andJuly1.

Illustration10A-9

Assumeabondissueof10%,five-yearbondswithafacevalueof$100,000withinterestpayablesemiannuallyonJanuary1andJuly1.

Illustration10A-10

Assumeabondissueof10%,five-yearbondswithafacevalueof$100,000withinterestpayablesemiannuallyonJanuary1andJuly1.

Illustration10A-11

APPENDIX

10B

Effective-InterestMethod

Effective-InterestMethodofBondAmortization

Undertheeffective-interestmethod,theamortizationofbonddiscountorbondpremiumresultsinperiodicinterestexpenseequaltoaconstantpercentageofthecarryingvalueofthebonds.

Requiredsteps:

Computethebondinterestexpense.

Computethebondinterestpaid(oraccrued).

Computetheamortizationamount.

10-89

LO10Applytheeffective-interestmethodofamortizing

bonddiscountandbondpremium.

APPENDIX

10B

Effective-InterestMethod

LO10

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90

AmortizingBondDiscount

Illustration:Candlestick,Inc.issues$100,000of10%,five-yearbondsonJanuary1,2015,for$92,639,withinterestpayableeachJuly1andJanuary1.Thisresultsinadiscountof$7,361.

Illustration10B-2

Illustration:Candlestick,Inc.issues$100,000of10%,five-yearbondsonJanuary1,2015,for$92,639,withinterestpayableeachJuly1andJanuary1.Thisresultsinadis