Chapter 14 Flashcards
_______is greater than ______ to a be a premium?
contract rate…..market rate
How do you determine the premium?
Amount recieved - face amount
What is the opposite of a premium?
Discount
How are premiums ammortized?
Semi-annually
A company issues $6,000,000 bonds, 10%, 5 year semi annual interest of $300,000, receiving cash of $6,341,825. Journalize the bond issuance.
Debit: cash $6,431,825
Credit: Premium on Bonds payable–$341,825
Bonds Payable $6,000,000
What is a benefit of Premiums?
Higher interest and yield
What is a present value of an annuity?
It is the sum of the present values of each cash receipt.
When a corporation issues bonds the investors are willing to pay depending on what?
- The face amount of the bonds, which is the amount due at the maturity date.
- The periodic interest to be paid on the bonds.
- The market rate of interest.
The selling price of a bond is the present value. using the current market rate of interest of the following:
- The face amount of the bonds due at the maturity date
- The period interes is to be paid on the bonds.
Entry for annual payments
Debit to Interest Expense & Notes Payable
Credit to Cash
Entry to issue an installment note
Debit to Cash
Credit to Notes Payable
When is the principal paid in full?
At the end of the note’s term
How is the principal portion of an installment calculated?
Difference of the total cash paid- interest
How is the interest portion of an installment calculated?
Multiplying the interst rate by the book value
On the first day of the fiscal year, a company issues $65,000, 10%, six year instsllment. Annual payments if $14,924. The first note payment consists of $6,500 and interest of $8424 of principle repayment. a) Journalize the issuance of the note and b) first anual payment
a) Debit –> Cash- $65,000 ; Credit–> Notes Payable- $65,000
b) Debit–> Interest Expense- $6,500 & Notes Payable - $8,424; Credit –> Cash- $14,924
What is the future value?
The estimated worth in the future of an amount of cash on hand today invested at a fixed rate of interest.
What is present value?
The estimated worth today of an amount of cash to be received (or paid) in the future.
What is an annuity?
A series of equal cash flow at fixed intervals.
A $150,000 bond issue on which there is an unamortized premium of $20,000 is redeemed for $145,000. What is the gain on Redemption of Bonds?
$25,000
A $90,000 bond issue on which there is an unamortized discount of $30,000 is redeemed for $75,000. What is the loss on the Redemption of Bonds?
$15,000
A bond was issued for $190,000 of 30 years, 10% callable on September 25. What is the face amount of the bond payable?
$190,000
A bond was issued for $200,000 of 20 years, 10% callable on August, 2018 with interest payable on August 27 and November 25. What is the interest expense?
$10,000
Wood Pecker Corp. have a $100,000 Callable Bond. They called the bond at the rate of 140. Journalize the entry of the rate of the bond.
Debit, Loss on Redemption of Bond $40,000
Wood Pecker Corp. have a $100,000 Callable Bond. They called the bond at the rate of 70. Journalize the entry of the rate of the bond.
Credit, Gain on Redemption of Bond $30,000
Bond
A Form of and interest-bearing note
True or False?
A Bond requires periodic interest payments with the face amount to be repaid at the maturity date
True
Earnings Per Share
Measures the income earned by each share of common stock
Determine the earnings per share of common stock, assuming income before bond interest & income tax is $1,000,000
Income Tax 40%
issue 8%bond at face value $5,000,000
issue Common Stock, $25 par $5,000,000
$ .90
Determine the earnings per share of common stock, assuming income before bond interest & income Tax is $3,000,000
Income Tax 40%
Bonds Payable 10% $10,000,000
Preferred $1 Stock, $10 par $10,000,000
Common Stock $25 par $10,000,000
$ .50
Determine the earnings per share of common stock, assuming income before bond interest & Income Tax 40%
Bonds Payable 10% $10,000,000
preferred $1 stock, $10 Par $10,000,000
Common stock $25 par $10,000,000
$ 3.50
