Calculate the issue price of a $1,500,000 bond issue and prepare the journal entries for the issuance and first years' interest payments (use the effective interest method). Assume the bonds are paid semiannually (June 30 and. The effective interest method is the method used by a bond buyer to account for accretion of a bond discount as the balance is moved into interest income or to amortize a bond premium into an interest expense. The effective interest rate uses the book value, or the carrying amount of the bond, Bringing it home with the journal entry to record payment at the end of each year, journalize the first year by debiting cash for $1,200, discounts on notes receivable for $272, and crediting interest revenue for $1,472. For the second year, you debit cash for $1,200 discounts on notes receivable for $294 This video explains how to calculate a bond that sells at a discount. It shows the corresponding journal entries on the original sale and interest payments. It also shows how to prepare the
Effective interest rate method Financial assets that meet the recognition criteria of the amortized cost, say a bond, carry a specified cash flow stream represented by their coupon rate (also called the stated interest rate) i.e. the rate at which the bond pays periodic interest/coupons.
The effective interest method is one method of calculating how the premium or discount on bonds payable should be amortized to the interest expense account over the lifetime of the bond. The effective interest method involves preparing a bond amortization schedule to calculate the interest expense based on the market rate at the time the bond was issued and the bonds book value. By entering this information into the effective interest rate formula, we arrive at the following effective interest rate: (1 + 10%/4)^4-1 = 10.38% Effective interest rate. There are other circumstances that can alter the interest rate paid to an even greater extent. July 15, 2016, Journal Entries. 6. Entity A makes the following journal entries for interest payable. It accrues semi-annual interest at an affixed rate of 6.5% [(6.5% × $10,000) ÷ 2] and pays the balance. Interest expense $325. Accrued interest payable $325. Accrued interest payable $325 The effective interest method of amortization causes the bond's book value to increase from $95,000 January 1, 2017, to $100,000 prior to the bond's maturity. The issuer must make interest payments of $3,000 every six months the bond is outstanding. The cash account is then credited $3,000 on June 30 and December 31. Effective interest rate method Financial assets that meet the recognition criteria of the amortized cost, say a bond, carry a specified cash flow stream represented by their coupon rate (also called the stated interest rate) i.e. the rate at which the bond pays periodic interest/coupons. July 15, 2016, Journal Entries. 6. Entity A makes the following journal entries for interest payable. It accrues semi-annual interest at an affixed rate of 6.5% [(6.5% × $10,000) ÷ 2] and pays the balance. Interest expense $325. Accrued interest payable $325. Accrued interest payable $325 Calculate the issue price of a $1,500,000 bond issue and prepare the journal entries for the issuance and first years' interest payments (use the effective interest method). Assume the bonds are paid semiannually (June 30 and.
July 15, 2016, Journal Entries. 6. Entity A makes the following journal entries for interest payable. It accrues semi-annual interest at an affixed rate of 6.5% [(6.5% × $10,000) ÷ 2] and pays the balance. Interest expense $325. Accrued interest payable $325. Accrued interest payable $325
By entering this information into the effective interest rate formula, we arrive at the following effective interest rate: (1 + 10%/4)^4-1 = 10.38% Effective interest rate. There are other circumstances that can alter the interest rate paid to an even greater extent.
This video goes through the calculation of a bond premium and then prepares a spreadsheet showing the amortization of the premium. Finally it shows the corresponding journal entries. To see all my
7 May 2017 Under the effective interest method, the effective interest rate, which is Muscle's controller records the following journal entries in each of the The bank's required interest rate is an annual rate of 12%. The effective interest amortization method is more accurate than the straight-line method The table is necessary to provide the calculations needed for the adjusting journal entries. For bonds issued at face value, interest payment entries are simple: debit Interest Expense The effective interest rate method is somewhat more complicated.
July 15, 2016, Journal Entries. 6. Entity A makes the following journal entries for interest payable. It accrues semi-annual interest at an affixed rate of 6.5% [(6.5% × $10,000) ÷ 2] and pays the balance. Interest expense $325. Accrued interest payable $325. Accrued interest payable $325
JWS uses the effective interest method. Prepare the company's journal entries for (a) the January 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry. Assume an effective interest rate of 6%. Straight line vs. effective interest method The critical observation to make is that the straight line method is a much more simple calculation. Straight line amortization of premiums or discounts Assume the same facts as for the preceding bond illustration, but this time imagine that the market rate of interest was something less than 5%. Now, the 5% bonds would be very attractive, and entice investors to pay a premium: The above entry assumes the investor paid 106% of par ($5,000 X 106% = $5,300). Demand Corporation owns a patent that has a carrying amount of $720,000. Demand expects future net cash flows from this patent to total $520,000. The fair value of the patent is $375,000. Prepare Demand's journal entry, if necessary, to record the loss on impairment. (Db.) Loss on Impairment 345,000 (Cr.)