EXAM 5

Question 1

what is face value?

Answer 1

It is the amount before accrued interest. so at maturity it will be amount repaid = face value + accrued interest.

Question 2

you borrowed a interest baring note; how do you journalize?

Answer 2

When cash is initially received you debit cash and credit notes payable

then when the year ends, then you accrue interest. you take face value times 1+ interest rate times tthe time from issued till end of year;
you journalise the interest expense by debited amount of interest and credit interest payable.

Paying it off:
Debit face value under notes payable
debit interest payable for total interest
credit cash

After you paid it off, then you multiply the face value by interest(amount of time)

Question 3

Bond issuance

Answer 3

if the contract IR (interest rate) is = to market IR then bond is sold at face value.

IF contract IR is lest than Market IR then it is Discounted

if Contract IR is greater than Market IR then it sells at a premium

Question 4

Journalizing Bonds

Answer 4

Cash is debited and Bonds Payable is credited

When bonds are purchaced at a premium then you would also credit Premium on bonds payable for the difference

When the bonds are purchased on discount then you would DEBIT the difference as well

Question 5

straight-line method

Answer 5

allocates the same amount to interest expense in each interest period. bond discount or premium amortaiation = bond discout or premum divided by number of interest periods.