Chapter 9 Terms

Question 1

current or short-term liabilities

Answer 1

a form of debt that is expected to be paid within the longer of one year of the balance sheet date or one operating cycle

e.g. accounts payable, wages or salaries payable, unearned revenues, short-term notes payable, current portion of long-term debt

Question 2

long-term liabilities

Answer 2

forms of debt expected to be paid beyond one year of the balance sheet date or the next operating cycle, whichever is longer

e.g. mortgages, long-term bank loans, bonds payable

Question 3

known current liabilities

Answer 3

liabilities where the payee, amount, and timing of payment are known

e.g. accounts payable, unearned revenues, payroll liabilities, sales taxes

Question 4

estimated current liabilities

Answer 4

the liability amount is not known and must be estimated

Question 5

What are the journal entries to record a business’ payroll liabilities for its two employees?

Remember to also record the employer’s portions of EI and CPP as a second journal entry.

Answer 5

debit sales salaries expense
debit office salaries expense
credit EI payable
Credit employee income taxes payable
credit employee health insurance payable
credit CPP payable
credit salaries payable

to record payroll

ALSO DO THE FOLLOWING:

Debit EI expense
Debit CPP expense
Credit EI payable
Credit CPP payable

to record the employer’s portions of EI and CPP

Question 6

2023 EI employer contribution amount

Answer 6

1.63 times employee’s portion in 2023

The textbook is using 1.4 because that is what it was at the time

Question 7

2023 CPP employer contribution amount

Answer 7

Equal to employee contribution amount

https://www.canada.ca/en/revenue-agency.html will give more information though since there is more to pay that is listed there

Question 8

two types of sales tax in Canada

Answer 8

Goods and Services Tax (GST) at 5% the selling price of taxable supplies (so not zero-rated supplies or exempt supplies)

Provincial Sales Tax (PST) at different rates depending on the province paid by final consumers of products as a percentage of the selling price

Quebec Sales Tax (QST) is what is paid in Quebec instead of PST.

Harmonized Sales Tax (HST) is a combination of GST and PST and is used in some provinces instead of using the two types of sales tax

Question 9

taxable supplies

Answer 9

the goods or services on which GST applies

zero-rated supplies are not taxable

exempt supplies are not taxable

Question 10

zero-rated supplies

Answer 10

prescription drugs, groceries, medical supplies

Question 11

exempt supplies

Answer 11

services such as education, health care, financial

Question 12

registrant

Answer 12

sellers of taxable supplies registered with Canada Revenue Agency that collect GST on behalf of the Receiver General for Canada

The GST is paid on the purchase of taxable supplies recording an input tax credit

Question 13

Receiver General for Canada

Answer 13

federal government body

all taxes including federal income tax are remitted to the Receiver General for Canada

Question 14

When is PST paid?

Answer 14

When the FINAL consumer purchases a product, PST is paid as a percentage of the selling price.

However, there is delay from the consumer purchasing the product to the taxes being sent in to the receiver general, so PST received from the consumer will be recorded as PST payable by the merchandizing company and will stay as a payable until PST is remitted.

A merchandizing company will credit PST payable when they sell the product to the customer. PST is frequently 5% of the selling price to the customer, so you will see that it would be exactly 5% of the “sales” portion of the journal entry.

The debit of cash on the entry will be higher than sales since the merchandizer will be collecting PST on behalf of the receiver general.

The entry for GST can also be made within the journal entry.

E.g.:

debit cash (full amount, including PST and GST)
credit sales (the selling price not including tax)
credit PST payable (% of sales listed just above, look up amount the province, 5% in Saskatchewan)
credit GST payable (% of sales, 5% in Saskatchewan)

Question 15

When is GST paid?

Answer 15

Anytime the product is sold, even if not to the final consumer, GST must be paid. The journal entries for this are therefore more complicated since there is GST being collected by both the supplier and by the merchandizer, but in the end all the GST ends up with the receiver general.

Question 16

input tax credit

Answer 16

Input tax credit is what is recorded when registrants purchase taxable supplies to remember to deduct it from the GST that needs to be remitted later. “Registrants also pay GST on the purchase of taxable supplies recording an input tax credit for the GST paid”

Merchandisers are paying GST to the supplier, and the supplier remits the GST for that purchase. Therefore, merchandise inventory is debited as usual, but there is another account called GST receivable which is debited so that the accounts payable to the supplier can reflect a total of the sale price plus the GST.

Debit merchandise inventory
Debit GST receivable (also known as input tax credit at 5% of the merchandize inventory)
Credit accounts payable (total of the two debits above)

input tax credit also known as GST receivable

GST receivable is just the GST that you, the merchandiser, have given to the supplier. The name implies that since you have given that away, that you no longer are going to need to pay that portion of the GST to the receiver general, which makes sense since the cash you pay later = PST payable + GST payable - GST receivable

Later entries will include GST payable which will be the consumer’s GST that they have given you. This will create a situation where you have too much money since the GST the customer gave you belongs to the receiver general. That is why it is called GST payable, since you must pay it to the receiver general.

The GST the final consumer pays you is not equal to the GST you as a merchandiser paid the supplier, since the merchandiser sells at a higher price. Typically, the GST payable will be a higher amount than the input tax credit.

GST amount to be remitted (given away) to the receiver general = GST payable (that’s the GST the consumer paid you, the merchandiser) - total input tax credit (that’s the GST that you, the merchandiser, paid the supplier on original purchase)

(sometimes this equation is expressed as amount to be refunded = total input tax credit - GST payable, so be able to recognize that too)

Question 17

journal entries for a merchandiser for the purchase of inventory on account from a supplier including GST

Answer 17

debit merchandise inventory (the sale price from the supplier which is not the sale price to the final consumer)
debit GST Receivable (extra to the sale price, based off the GST rate, percentage of that sale price)
credit Accounts Payable (the full amount to the company you are buying from)

To record purchase of merchandise inventory on account

so the merchandiser ends up paying more to cover the GST and that GST is given to the supplier, who will then give that to the receiver general

notice that accounts payable will be different than the sale price since the sale price does not include taxes

GST receivable is the amount that the merchandiser has to pay the supplier at the time of sale, and is debited here; this implies that we will be getting that GST back from the final consumer and then that portion is seen as a credit at that time towards the taxes you must pay to the receiver general. GST receivable is an asset, just like any other receivable.

The paying of GST is totaled in the account payable on that very first entry.

No PST for merchandisers since they are not the final consumer.

Question 18

journal entries for the sale of merchandise from the merchandiser to the final consumer of the product; the final consumer is using cash to pay

Answer 18

debit cash (the selling amount to the final consumer plus the PST and GST)
credit sales (the selling amount only)
credit PST Payable (this is the first entry where PST is shown since PST is only collected by the merchandiser who is making the final sale of that product, so only the customer is responsible for paying the PST, but it is collected by the merchandiser on behalf of the receiver general)
credit GST Payable (the customer’s portion, but still the “full” percentage of the sales, since GST is collected every time a product changes hands)

to record cash sale

ALSO YOU WILL NEED THE FOLLOWING ENTRY:

debit COGS
credit Merchandise Inventory

you may credit HST Payable if that province is using harmonized sales tax

you may not have an entry for PST if that province does not use PST

GST is charged to the merchandiser and to the final consumer, but in these entries we are only seeing the final consumer’s GST. The merchandiser’s GST was collected by the supplier already when they originally got their stock in.

However, once that GST has been charged twice, it is then rectified with the input tax credit taking away from the taxes payable to the receiver general. So the receiver general is not receiving twice the GST. They are just receiving the appropriate percentages of GST based on the sale at that time. This is rather complicated, but you are able to follow the journal entries now so that is a start.

PST is only charged to the final consumer

Question 19

what are the journal entries to record remittance of sales taxes assuming PST and GST were paid at the time of sales

Answer 19

debit PST payable (to reverse the PST payable credit from earlier)
debit GST payable (to reverse the GST payable credit from earlier)
credit GST receivable (to reverse the GST receivable debit that was done at the very start when purchasing from the supplier as the merchandiser)
credit cash (the amount you are paying the government authority)

to record remittance of sales taxes to the appropriate government authority

The input tax credit allows the merchandiser to track that they have paid their portion of GST to the supplier. It makes it easier for the receiver general to see that all GST is getting paid. So you are basically required as a merchandiser to pay the GST and PST from the consumer to the receiver general, and the money that you already paid the supplier gives you a discount on how much you have to pay the receiver general.

Question 20

What are the journal entries to record the conversion of an account payable to a note payable?

Answer 20

debit accounts payable to the specific supplier
credit notes payable to the specific supplier

to record the conversion of a supplier’s account to a 5%, 60-day note dated Dec 5, 2023 (numbers here are just an example to show what the description could include)

Question 21

What is the adjusting entry to accrue interest on a note payable?

Answer 21

debit interest expense
credit interest payable

to record the adjusting entry on Dec 31 to accrue interest from Dec 5 to Dec 31

Question 22

What is the journal entry to record the payment of the principal and interest at maturity of a note payable?

Answer 22

debit notes payable (to the specific supplier; the total principal amount)
debit interest expense (the newest interest that came)
debit interest payable (the amount from before to reverse that entry)
credit cash (the total amount that you are paying to take away the entire debt)

to record the payment of the principal and interest at maturity on Feb 3, 2024 (numbers are just an example of what you could include in the description)

Question 23

to final consumer example of service provided in Yukon: answer the question in the picture

Answer 23

Question 24

Two common examples of estimated liabilities

Answer 24

• warranties
• income taxes

Question 25

warranty and journal entries required

Answer 25

• obligation incurred by the seller of a product or services to replace or repair defects
• typically apply for a limited period of time
• seller does not know which product/service, when, or amount in advance
• must ensure to match the warranty expense to the period in which the revenue was realized, so you will need to estimate the warranty expense and double entry it with the liability

debit warranty expense
credit estimated warranty liability

to record estimated warranty expense and related liability

Then when warranty work is performed:

debit estimated warranty liability
credit parts inventory
credit wages payable
to record the actual costs of parts and labour for warranty work

Question 26

How do you record estimated income tax expense?

Answer 26

debit income tax expense (to match the expense to the correct month)
credit income tax payable (to create a liability until the monthly payments of income tax is actually paid but based on an annual estimate that will be adjusted later when the company determines what income tax was actually calculated at the end of the year)

Keep in mind that this expense is recorded at the end of each accounting month, and is likely being payed monthly but on a different date than this entry.

Question 27

How do you record payment of income tax?

Answer 27

Debit income tax payable (to reverse the liability that was created at the end of the month prior)
Credit cash (to show cash leaving)

Question 28

How do you correct the income tax expense now that you know what the income tax is at the end of the year? (You had been doing monthly payments based on an estimate up to this point)

Answer 28

Keep in mind that you have not yet made your entry for the end of that month, so even if the estimated amount was too high, you likely still have to show it as you having more expense to make up for the month that hasn’t been recorded yet. So if there is still something to pay in that month, show that amount in the following entries:

debit income tax expense
credit income tax payable

to report income tax expense

You may have to use a reverse debit and credit if you severely overestimated how much tax you would need to pay over the year.

So the calculation will be to look at what you have already paid in taxes (11 months worth of the estimated amount), and compare that to how much total taxes you actually need to pay over the 12 months. Use the above entries if you still need to pay more. If not, then reverse the entries to show that negative number.

Question 29

contingent liability

Answer 29

the liability is not probable or

the liability cannot be reliably estimated

• these are not recorded but must be recorded in the notes to the financial statements (unless there is a remote likelihood of its existence)

E.g.: a contingent liability can be a lawsuit where it is probable that there will be a loss but the amount cannot be reliably determined

Question 30

contingent asset

Answer 30

the asset cannot be reliably estimated

contingent assets are not recorded until actually realized

If a contingent asset is probable, it is disclosed in the notes to the financial statements

Question 31

How do you record it when an item that is defective is returned to you and replaced with a new one? Assume the item returned to you is thrown away immediately upon receipt.

Answer 31

debit estimated warranty liability

credit merchandise inventory

Question 32

bonds

Answer 32

debt instrument that requires future repayment of the original amount at a fixed date as well as periodic interest payments during the intervening period (intervening here means between two points in time so between when the bond is issued to when it matures, called the maturity date)

• pay only interest at regular intervals to investors
• original investment is only repaid to a bondholder when it comes due (matures) and this is many years later
• issued to many investors (usually)

Question 33

loans

Answer 33

• repaid in equal payments combining both interest and principal paid to creditors (called blended payments)
• interest is on the remaining balance of the loan

Question 34

debt financing

Answer 34

issuing long-term debt in order to finance the corporation including long-term debt such as bonds (section 9.4) and loans (section 9.5)

Question 35

equity financing

Answer 35

issuing shares in order to finance the corporation (discussed further in chapter 10)

Question 36

bond indenture

Answer 36

contract between corporation and the future bondholders specifying how much interest will be paid and when and other terms such as future borrowing privileges

Question 37

trustee (context = bonds)

Answer 37

administers the terms of the bond indenture (also known as “indenture”) acting as the intermediary between the corporation and the bondholder

Question 38

two rights of individual bondholders

Answer 38

1. the right to receive the face value of the bond at the maturity date (the maturity date must be specified)
2. the right to receive periodic interest payments at a specified percent of the bond’s face value

Question 39

What is the difference between an authorized bond and an issued bond?

Answer 39

Bonds must be authorized before they are issued. Sometimes bonds will be authorized and not issued because the cash is not actually needed just yet. Authorized bonds can be issued whenever cash is required.

Question 40

pledge an asset (context = bonds)

Answer 40

pledge = formal promise or agreement

to pledge an asset means to promise to give up the asset should the company not be able to repay the bond amount (principal) or interest back to the bondholder

the asset pledged is usually worth twice the amount of the bond giving bondholders a large margin of safety should the asset’s value shrink substantially

Question 41

secured bonds

Answer 41

bonds backed by physical assets of the corporation (usually long-lived assets)

(a physical long-lived asset is legally pledged as security)

Question 42

mortgage bonds

Answer 42

bonds backed by real property

(real property is legally pledged as security)

Question 43

debentures

Answer 43

= unsecured bonds
- formal document stating that a company is liable to pay a specified amount with interest
- debt is not backed by collateral
- usually only issued by large, well-established companies
- debenture holders are ordinary creditors of the corporation
- these bonds pose a higher risk for investors so they usually command a higher interest rate

Question 44

registered bonds

Answer 44

bonds requiring the name and address of the owner to be recorded by the corporation or its trustee

Question 45

bearer bonds

Answer 45

• bonds that are issued by a company but that do not have a fixed owner or holder, but the owner is determined by the person who is currently holding it in their possession
• the title to bearer bonds passes on delivery of the bonds to the new owners and the original owner is not tracked
• these are increasingly rare
• involve coupons that are attached to the bond and these coupons are presented in order to receive payment

Question 46

serial bonds

Answer 46

• differing maturity dates are made available so that investors are able to choose the term that works best for their personal investment plans
• so a serial bond will have several maturity dates for the one person investing and you would get money back from the original investment periodically, not just interest but some of the principal amount you originally gave the company.

Question 47

call provision

Answer 47

If this provision is made when the bonds are issued, it allows the corporation to redeem (call) the bonds before their maturity date.

This allows corporations to stop needing to pay a high interest rate on their bonds and change that up for regular market rate investing should the market rate fall and should that become a more viable option. Or higher interest rate bonds can be called to be replaced by lower interest rate bonds.

Call provisions are good for corporations, but not really for the bond holder.

these bonds are called callable bonds, which give the issuer the right to call and retire the bonds before maturity

Question 48

convertible bonds

Answer 48

• bonds that you have the option to convert to the corporation’s share capital allowing bond-holders to become shareholders when the corporation is looking like it will become more successful

(notice that for a company, they would want to issue shares rather than bonds since bonds come with interest, whereas shares you just pay some of what you are making, so convertible bonds allows the company to encourage bond-holders to become shareholders)

Question 49

restriction of dividends

Answer 49

dividends declared cannot exceed a specified balance in retained earnings protecting bondholders by limiting the amount of dividends that can be paid

Question 50

face value of the bond

Answer 50

= par-value of the bond

the amount printed on the face of the bond certificate

When cash received is the same as the bond’s face value, the bond is said to be issued at par

It is common for the face value to be $1,000

So larger bond amounts will be divided up into multiple bonds with a face value of $1,000 or similar permitting a large number of individuals and institutions to participate in corporate financing

Question 51

journal entry to record a bond sold at face value

Answer 51

debit cash
credit bonds payable

to record the issue of 8% bonds at par

Question 52

bond sold at premium

Don’t give accounts just state when this happens

(Sold means given out, not maturity)

Answer 52

if a bond is sold for more than its face value it is said to be sold at premium

This occurs when the bond interest rate is higher than the market interest rate.

Someone looking to buy a bond will want to pay more for one that offers better interest return so they will want to buy the bond even if they need to pay a premium.

This way the company will get paid a premium and then the company will need to make sure to pay that high interest rate to the individual. So the premium is there to pay for the higher interest.

selling price of bond - face value = premium

Question 53

PMT

Answer 53

payment

(the interest payment amount of a bond for one period, or the blended interest and principal payment if a loan)

Question 54

FV

Answer 54

fair value (used to evaluate the worth of assets at current market price, rather than book value)

In bonds, it is equal to the face value and is the future value

Question 55

i

Answer 55

the market interest rate, also known as market rate (but make sure to only put the interest for that time period, so 9% market rate with semi-annual payments will give i = 4.5)

Question 56

journal entry to record the issue of a bond at premium

Answer 56

debit cash (full amount)
credit bonds payable (the face value)
credit premium on bonds payable (difference between selling price of the bond and the face value)

to record the issue of 8% bonds at a premium

Question 57

premium on bonds payable account

Answer 57

contra-liability account (this is misleading since it seems have a credit balance just like liabilities and is added, so double check this)

Added to the value of the bonds on the balance sheet

Liabilities

Current

 Bonds payable            $1,000
 Add: Premium on bonds payable  $9   1,009

Question 58

PV

Answer 58

Present Value
The present value is the amount you would need to invest now, at a known interest and compounding rate, so that you have a specific amount of money at a specific point in the future.

This is also something you would calculate to find the PV of a bond’s face value (the bond’s face value is the future value in these calculations). Then you can use the PV to calculate the premium or discount on the bond.

In loans, the PV is the principal and can be used to calculate the monthly payments. With the monthly payment amount and the interest rate you can calculate the drop of the principal over time.

• table values are rounded and less accurate than business calculators so for this course, all PV calculations should be done using a business calculator

PV=FV/(1+i)^n is the formula I found for PV at the website below and in appendix 9.6.

You should also know how to use the lyryx functions to calculate PV and PVA.

To calculate the PV of a bond (that is if you know the face value and want to determine the issue price), input these numbers in the present value calculator for the PV calculation:

FV = The future value OR face value of the bond
n = Number of payments (periods)
i = Market interest rate for that period
Compounding frequency will be used to help calculate the number of payments as well as the market interest rate for that period, but is not directly entered in the calculator.
PMT = Cash flow payments going out, which is the size of one payment, and these are all equal; calculate this using the bond interest rate and the face value.

Notice that there are several interest rates that you are dealing with, so make sure that you are clear on these.

Extra info:
We calculate PMT when trying to find the payments on a loan and enter in PV, i, and n.

This calculator will do the calculations: Texas Instruments BA II Plus Financial Calculator

Question 59

What happens to the premium when the bond matures?

Answer 59

The premium is written off as a reduction of interest expense

I think this means that you would credit interest expense and debit premium on bonds in order to reverse the premium on bonds and reverse the interest expense but I’m making this up right now and need to check this later.

Question 60

What are the three journal entries to be made when a bond that was issued at premium is matured? (usually this is a single entry, but to learn you can know these three)

Answer 60

debit interest expense
credit cash

to record interest paid on bonds

debit bonds payable
credit cash

to record payment of bonds

debit premium on bonds payable
credit interest expense

to record write-off of premium against interest

Question 61

What is the preferred single entry to record the maturity of a bond that was issued at premium?

(Opposite of issuing a bond. Not redemption of bond since it was planned that the bond would mature at this time)

Answer 61

debit interest expense (the market rate of interest at the time of bond issue, or the interest that the company needs to pay minus the premium)
debit premium on bonds payable (the premium amount)
debit bonds payable (the face value)
credit cash (the premium plus the face value)

to record payment of bond and interest on maturity date

The image below shows what was recorded at the issuance of the bond so you can see which accounts need to be cancelled out.

Question 62

What is the single journal entry to record a bond issued at a discount

Answer 62

(occurs when the bond interest rate is lower than the market interest rate)

debit cash (the difference between face value and the discount amount, so what the investor is actually paying)
debit discount on bonds payable (the discount amount)
credit bonds payable (the face value)

The discount on bonds payable is a contra liability account. The discount is recorded in brackets and is “added” to the bonds payable, but since it is negative it creates a subtraction.

Liabilities

Current

Bonds payable $1,000
Less: Discount on bonds payable ($9) $991

Question 63

What is the single journal entry to record the payment of a bond and interest on maturity that was issued with a discount?

Answer 63

debit interest expense (discount amount plus interest, equal to the market rate of interest at the time of bond issue)
debit bonds payable (face value of bond)
credit discount on bonds payable (discount amount at issuance)
credit cash (the addition of the face value and the interest expense but not including the discount amount)

to record payment of bond and interest on maturity date

Section 9.8 appendix will explain the use of effective interest method for bonds issued at a premium or discount

Question 64

outstanding bonds

Answer 64

bonds can be outstanding for a number of years and there are related premiums and discounts as well as amortization to take into account if this is the case. The amortization of premiums and discounts is an intermediate financial accounting topic and is not covered in this introductory course.

Question 65

Most corporations pay interest out on their bonds every 6 months, but to everyone at the same time. This creates a problem for someone buying a bond between these interest payment times. How is this handled?

Answer 65

When the bondholder is issued the bond, they pay the interest for the time that has passed since the last interest payment went out to everybody.

Debit cash (bond amount plus interest amount for time that has passed since the mass payout of interest to bond holders)
credit bond payable
credit interest payable (the elapsed interest amount that has been charged to the new bondholder in advance; this is done in advance to make up for the fact that they are going to be paid 6 months worth of interest on their next payment of interest but they have not had 6 months of time in the bond)

For example, if four months have passed since the last interest payment went out, then the interest payable above would be recorded as 4 months worth of interest. Then in the next journal entry on the next payment of interest, 6 months of interest would be paid out. This would allow the bond holder to get the equivalent of two months worth of interest.

Question 66

journal entry for company’s loss on redemption of bonds (when the company wants to call the bond early) assuming there was a discount when it was issued

Answer 66

debit bond payable (face value)
debit loss on redemption of bonds (the loss on redemption = carrying value on call date - re-acquisition price)
credit cash (re-acquisition price)
credit discount on bonds payable (par value - bond payable carrying value on call date)

practice this in the lesson on pages 13-17 of 9.4

Why is interest expense not included?

Question 67

9.6 will be studied before finishing 9.4 in order to understand the math better.

What is interest? What is compound interest? Use interest to explain present value and future value using borrowing $1 at 10% interest as an example. Show over one year, and then over two years.

Answer 67

The time value of money.

If you borrow $1 today for one year at 10% interest, its future value in one year is $1.10.
So FV = PV(1+i)

If you are to pay $1.10 one year from today at 10% interest, its present value is $1.
So PV = FV / (1+i)

But if you keep borrowing then the interest is compounded right, so this is why the equations look different if the interest over a year is now going to get calculated again for another payment, for say a second year. This is called compound interest, where interest is paid on interest.

When dealing with compound interest you must use this equation:

FV = PV(1+i)^n

Rearrange this equation as necessary

Where FV = future value
PV = present value
i = interest rate for one payment period (not annual)
n = number of periods (think number of payments)

So to calculate over 2 years:

FV = $1(1+0.1)^2
= $1.21 not $1.20!!!!

When using a business calculator, interest is always entered as a percent and not a decimal.

PMT = dollar amount of interest per period

Question 68

What makes a bond sell at a premium?
What makes a bond sell at a discount?

Answer 68

If the market interest rate is less than the bond interest rate, then the bond will sell at premium so PV will be more than FV.

If the market interest rate is more than the bond interest rate, then the bond will sell at a discount so PV will be less than FV.

Question 69

How do you calculate the issue price of a bond given everything else?

Answer 69

this is lesson page 15 of 9.4 for practice

Remember that the market interest rate is what is used to calculate i. Make sure to divide by the amount of payments in a year to calculate i.

The interest rate of the bond is what is used to calculate the payment. payment = (interest rate of bond / payments per year)(principal)

You will be inputting the FV and calculating the PV to determine the issue price of the bond. One of these will be negative and the other will be positive since money is either going in or out and they are opposite each other. So if money is taken in then it is positive. When you pay the principal back to the person it is negative.

Question 70

PV Lyryx calculation given market interest rate, payments per year, years of the bond, and bond amount

Answer 70

PV (n;i) will return the present value of a bond with n payments, and i interest rate per period, assuming the bond is $1

You need to multiply by the bond amount once you make this calculation.

For example, the calculate the present value of a $470,000 bond, where 11% is the interest rate of the bond, 13% is the market rate at the time of issue, and it is a 9-year bond with quarterly payments, you will first need to determine n and then i, then input them into the lyryx as a formula.

n = number of payments (also known as number of periods)
= (9 years)(4 payments / year)
= 36 payments

i = MARKET interest rate per period
= 13% / 4 periods
= 3.25 % / period

PV of $470,000 bond = 470000(PV(36;3.25)

I think you need to involve the bond interest as well and this is likely done with PVA calculation, so this card needs to be checked still before you study it.

Question 71

loan

section 9.5

Answer 71

long-term debt that a corporation can use to finance its operations

can be secured

typically obtained from one lender such as a bank

repaid in equal blended payments over a period of time (interest and some repayment of principal)

does not give rise to a premium or discount because it is obtained at the market rate of interest in effect at the time

Question 72

secured loan

Answer 72

gives the lender the right to specified assets of the corporation if the debt cannot be repaid

Question 73

journal entry to record a loan obtained

Answer 73

debit cash
credit loan payable

simple stuff :)

Question 74

compute payment given the loan amount, interest rate, amount of payments per year, and term of the loan:

Assume you have obtained a loan of $100,000 for an interest rate of 10% which is a 3-year loan (term is 3 years), and where payments are expected once a year. What is the payment amount?

Answer 74

In business calculator:
PV = 100,000
i = 10
n = 3

cmpt PMT = -40211.48

In lyrix 100000*PV(3,10) = 75131 gives the present value but not the payment. I’m not sure how to get the payment.

Lyrix can also give future value but this is also not helpful. 100000*FV(3,10) = 133100

You do know how to get the payment using the PMT formula with a scientific calculator, so just use that for the time being until you can figure out Lyrix

Calculating payments on an amortizing loan

Computing payments on amortizing loans is a bit more complicated than interest-only loans. To calculate an amortizing loan payment, use the following formula:

Loan amount x [ (r/12)/( 1 – (1+(r/12))^–n]

whereris the interest rate (expressed as a decimal) andnis the total number of payments over the life of the loan.

Let’s use our previous example of a $1,000,000 loan at 6% interest, except now it carries a term of five years, or 60 monthly payments. In that case, we would calculate the monthly payments like this:

Divide the interest rate of 0.06 by 12 months, written as (0.06/12) or 0.005.

Subtract 1.005^–60 from 1. Now divide the result into 0.005.

Multiply the product of the first two steps by the loan amount to obtain a monthly payment of $19,332.80.

Here’s what that looks like written out:

$1,000,000 x [(0.06/12)/(1–(1+(0.06)/12)^–60] = $19,332.80

Question 75

What is the formula for loss on redemption of bonds?

Answer 75

loss on redemption = carrying value on call date - re-acquisition price

Question 76

maturity of a bond

Answer 76

Opposite of issuing a bond

Question 77

To record the maturity of a bond issued at premium, what is the preferred single entry. One account is missing in the hint below:

debit ____________
debit premium on bonds payable
debit bonds payable
credit cash

Answer 77

debit interest expense (the market rate of interest at the time of bond issue, or the interest that the company needs to pay minus the premium)
debit premium on bonds payable (the premium amount)
debit bonds payable (the face value)
credit cash (the premium plus the face value)

Question 78

To record the maturity of a bond issued at premium, what is the preferred single entry. One account is missing in the hint below:

debit interest expense
debit premium on bonds payable
debit _____________
credit cash

Answer 78

debit interest expense (the market rate of interest at the time of bond issue, or the interest that the company needs to pay minus the premium)
debit premium on bonds payable (the premium amount)
debit bonds payable (the face value)
credit cash (the premium plus the face value)

Question 79

To record the maturity of a bond issued at premium, what is the preferred single entry. One account is missing in the hint below:

debit interest expense
debit _________________
debit bonds payable
credit cash

Answer 79

debit interest expense
debit premium on bonds payable
debit bonds payable
credit cash

Question 80

To record the maturity of a bond issued at premium, what is the preferred single entry. One account is missing in the hint below:

debit interest expense
debit premium on bonds payable
debit bonds payable
credit _____________

Answer 80

debit interest expense
debit premium on bonds payable
debit bonds payable
credit cash

Question 81

To record the maturity of a bond issued at premium, what is the preferred single entry. Three accounts are missing in the hint below:

debit _____
debit _____
debit _____
credit cash

Answer 81

debit interest expense
debit premium on bonds payable
debit bonds payable
credit cash

Question 82

To record the maturity of a bond issued at premium, what is the preferred single entry. All accounts are missing in the hint below:

debit _____
debit _____
debit _____
credit _____

Answer 82

debit interest expense
debit premium on bonds payable
debit bonds payable
credit cash

Question 83

What is the single journal entry to record the payment of a bond and interest on maturity that was issued with a discount?

Answer 83

debit interest expense
debit bonds payable
credit discount on bonds payable
credit cash

Question 84

What is the single journal entry to record the payment of a bond and interest on maturity that was issued with a discount?

debit ______________
debit bonds payable
credit discount on bonds payable
credit cash

Answer 84

debit interest expense (discount amount plus interest, equal to the market rate of interest at the time of bond issue)
debit bonds payable (face value of bond)
credit discount on bonds payable (discount amount at issuance)
credit cash (the addition of the face value and the interest expense but not including the discount amount)

Question 85

What is the single journal entry to record the payment of a bond and interest on maturity that was issued with a discount?

debit interest expense
debit __________
credit discount on bonds payable
credit cash

Answer 85

debit interest expense (discount amount plus interest, equal to the market rate of interest at the time of bond issue)
debit bonds payable (face value of bond)
credit discount on bonds payable (discount amount at issuance)
credit cash (the addition of the face value and the interest expense but not including the discount amount)

Question 86

What is the single journal entry to record the payment of a bond and interest on maturity that was issued with a discount?

debit interest expense
debit bonds payable
credit ___________
credit cash

Answer 86

debit interest expense (discount amount plus interest, equal to the market rate of interest at the time of bond issue)
debit bonds payable (face value of bond)
credit discount on bonds payable (discount amount at issuance)
credit cash (the addition of the face value and the interest expense but not including the discount amount)

Question 87

What is the single journal entry to record the payment of a bond and interest on maturity that was issued with a discount?

debit interest expense
debit bonds payable
credit discount on bonds payable
credit ________

Answer 87

debit interest expense (discount amount plus interest, equal to the market rate of interest at the time of bond issue)
debit bonds payable (face value of bond)
credit discount on bonds payable (discount amount at issuance)
credit cash (the addition of the face value and the interest expense but not including the discount amount)

Question 88

What is the single journal entry to record the payment of a bond and interest on maturity that was issued with a discount?

debit ______
debit ________
credit _________
credit _________

Answer 88

debit interest expense (discount amount plus interest, equal to the market rate of interest at the time of bond issue)
debit bonds payable (face value of bond)
credit discount on bonds payable (discount amount at issuance)
credit cash (the addition of the face value and the interest expense but not including the discount amount)

Question 89

What is the single journal entry to record a bond issued at a discount?

debit ______
debit discount on bonds payable
credit bonds payable

Answer 89

debit cash (the difference between face value and the discount amount, so what the investor is actually paying)
debit discount on bonds payable (the discount amount)
credit bonds payable (the face value)

Question 90

What is the single journal entry to record a bond issued at a discount?

debit cash
debit _________
credit bonds payable

Answer 90

debit cash (the difference between face value and the discount amount, so what the investor is actually paying)
debit discount on bonds payable (the discount amount)
credit bonds payable (the face value)

Question 91

What is the single journal entry to record a bond issued at a discount?

debit cash
debit discount on bonds payable
credit _________

Answer 91

debit cash (the difference between face value and the discount amount, so what the investor is actually paying)
debit discount on bonds payable (the discount amount)
credit bonds payable (the face value)

Question 92

What is the single journal entry to record a bond issued at a discount?

debit ________
debit ________
credit bonds payable

Answer 92

debit cash (the difference between face value and the discount amount, so what the investor is actually paying)
debit discount on bonds payable (the discount amount)
credit bonds payable (the face value)

Question 93

What is the single journal entry to record a bond issued at a discount?

debit cash
debit __________
credit ________

Answer 93

debit cash (the difference between face value and the discount amount, so what the investor is actually paying)
debit discount on bonds payable (the discount amount)
credit bonds payable (the face value)

Question 94

What is the single journal entry to record a bond issued at a discount?

debit ________
debit ________
credit _______

Answer 94

debit cash (the difference between face value and the discount amount, so what the investor is actually paying)
debit discount on bonds payable (the discount amount)
credit bonds payable (the face value)

Question 95

journal entry to record the issue of a bond at premium

debit ______
credit bonds payable
credit premium on bonds payable

Answer 95

debit cash (full amount)
credit bonds payable (the face value)
credit premium on bonds payable (difference between selling price of the bond and the face value)

Question 96

journal entry to record the issue of a bond at premium

debit cash
credit ________
credit premium on bonds payable

Answer 96

debit cash (full amount)
credit bonds payable (the face value)
credit premium on bonds payable (difference between selling price of the bond and the face value)

Question 97

journal entry to record the issue of a bond at premium

debit cash
credit bonds payable
credit _________

Answer 97

debit cash (full amount)
credit bonds payable (the face value)
credit premium on bonds payable (difference between selling price of the bond and the face value)

Question 98

journal entry to record the issue of a bond at premium

debit _______
credit _________
credit __________

Answer 98

debit cash (full amount)
credit bonds payable (the face value)
credit premium on bonds payable (difference between selling price of the bond and the face value)

Question 99

Price of a bond

Answer 99

The price of a bond is determined by discounting the expected cash flows to the present using a discount rate. The three primary influences on bond pricing on the open market are supply and demand, term to maturity, and credit quality. Bonds that are priced lower have higher yields.

The purchase price of the bond on an interest payment date is the sum of the present value of all of the remaining payments on the bond on this date and the present value of the face value of the bond on this date, using the yield rate to calculate the present values.

Question 100

Bond

Answer 100

Bonds pay only interest at regular intervals to investors. The original investment is repaid to bondholders when the bondmatures(or comes due), usually after a number of years. Bonds are generally issued to many individual investors.

Question 101

Bond issued at par

Journal entries as well

Answer 101

Each bond has an amount printed on the face of the bond certificate. This is called theface valueof the bond; it is also referred to as thepar-valueof the bond. When the cash received is the same as a bond’s face value, the bond is said to be issued atpar.

Question 102

PV and PVA calculations to price a bond using lyrix

Answer 102

= 420000PV(20,1)+420000(0.05/4)*PVA(20,1)

Notice that it is always the market interest rate inside the functions. It is the bond interest rate just for the interest portion outside of the function.

Bond price = (face value) (PV(n,i))+ (face value) (fraction showing interest portion for one payment using interest rate of bond) (PVA(n,I)

I called it face value but I’m not sure if that is the correct term.

Question 103

PMT calculation by scientific calculator

PV = 100,000
i = 10
n = 3

Answer 103

40211.48