A. First: Determine the amount of cash that will be paid each period –

Maturity Value x stated rate
# payments per year

$100,000 x .08 = $4,000
2 per year

Par means that the amount of cash received is the same as the maturity value and
the effective market interest rate is equal to the stated rate

	8%/2=4%        
	Effective		  8%/2=4%				      Premium/	     Carrying
	Interest %          Stated %          Difference	       Discount	   	   Value

1/1														 100,000
7/1	  4,000		    4,000                   0                       0                  100,000
1/1	  4,000		     4,000                  0                         0                     100,000

B. Issue the bond:

Cash			100,000
	Bond Payable	      100,000

First and second interest payments – the same journal entry is used

Interest Expense	4,000
	Interest Payable 	  4,000

When a bond is issued at par value there is no discount or premium because there is no difference in the interest expense incurred (market) and the cash paid for interest (stated)

First determine the cash paid each period:

Maturity Value x stated rate
# payments per year

$100,000 x .10
2 each year = $5,000

Put $5,000 in the stated column for all periods

Second Compute the amount in the effective interest column.

Prior period carrying value amount x market %
                 # payments per year

The premium or discount = maturity value – cash received (bond price)

The carrying value (amount owed) column always starts with the cash exchanged

    8%/2=4%	
	Effective	    10%/2=5%			    Premium/	   Carrying
	Interest %	Stated %	    Difference	Discount	     Value
										
1/1							                        13,592	       113,592
7/1	4,544		5,000		    456       	13,136            113,136
1/1	4,525               5,000                   475              12,661            112,661

B. Issue the bond:

Cash			113,592
	Bond Payable	     100,000
	Premium		       13,592


First and second interest payments –
the same journal entry, different numbers

1st	Interest Expense		4,544
	Premium                             456
		Cash			     5,000

													
2nd	Interest Expense		4,525
	Premium			       475
		Interest payable		 5,000

Interest is accrued on 12/31 because interest was incurred during the period ended 12/31 and not paid until the next year on 1/1.

C. $112,661 The amount in the carrying value column is the amount that will be reported for the Bonds payable on the balance sheet. Most companies do not show the premium part separate. The amount reported is the maturity value plus the premium.

The interest expense and adjustment to premium for the last 6 months of the year
will be recorded on December 31st, the company’s year end.

D. Total interest expense for the year is the first period plus the second period. The two six-month periods are equal to the full year interest expense incurred.

4,544 + 4,525 = 9,069 interest expense for the first year

When a bond is issued at par value there is no discount or premium because there is no difference in the interest expense incurred (market) and the cash paid for interest (stated)

A. First determine the cash paid each period:

Maturity Value x stated rate
# payments per year

$200,000 x .10
1 each year = $20,000

The same amount goes in the stated column for all periods

The amount that goes in the effective interest column is computed:

Prior period carrying value amount x market %
                     # payments per year

The premium or discount = maturity value – cash received (bond price)

The carrying value (amount owed) column always starts with the cash exchanged

      (11% / 1)         
	  Effective	  (10 % / 1)			        Premium/	   Carrying
	  Interest %	  Stated %	   Difference	    Discount	      Value

1/1						                                        7,392	    192,608
1/1	   21,187             20,000              1,187                6,205           193,795
1/1        21,317             20,000              1,317                4,888           195,112

B. Issue the bond:

Cash			192,608
Discount	                  7,392
	Bond Payable	     200,000


First and second interest payments – the same journal entry, different numbers

1st		
Interest Expense		21,187
	Discount			      1,187	
	Cash (interest payable)	 20,000

2nd		
Interest Expense		21,317
	Discount			       1,317			   	   
	Interest payable	          20,000

Interest is accrued on 12/31 because interest was incurred during the period ended 12/31 and not paid until the next year on 1/1.

C. On the balance sheet at the end of the 2nd year:

195,112
Carrying value at the end of the second annual payment period

D. Total amount of cash paid is equal to annual interest paid x number of years:

$20,000 paid each year x 5 years = $100,000 total cash paid

E. Interest expense for the life of the bond is total cash paid plus the discount. A discount means that interest incurred is higher than cash paid.

Cash Paid each year		  20,000
  x # of years				x         5
Total cash paid			100,000
+ discount		               	    7,392
Total interest expense		107,392

A.
Cash 50,000
             L/T Notes Payable 50,000

B. The amortization schedule determines interest expense each period and the amount owed at the end of each period.

	    		     10%			            Carrying Value
	Payment	   Interest	   Difference	   (Notes Payable)
							
                                                50,000
	15,775		5,000		10,775             39,225
	15,775 	    3,923		11,852			  27,373
	15,775		2,737		13,038			  14,335
	15,775		1,440**	    14,335		                 0

		** Interest must be adjusted due to rounding

C. Record payments made on the notes payable:

1st 	Notes Payable		10,775
	Interest Expense	  5,000
		Cash			  15,775

2nd 	Notes Payable		11,852
	Interest Expense	  3,923
		Cash			 15,775

D. The company will report that $27,373 is owed on the note payable at the end of
     two years.

E. Interest expense incurred the second year is $3,923.