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Chapter 12: Q18RQ (page 655)
Explain each of the key factors that the time value of money depends on.
The three key factors of the time value of money are principal, number of period and interest rate.
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What is an amortization schedule?
Bond prices depend on the market rate of interest, stated rate ofinterest,and time.
Requirements
1. Compute the price of the following 8% bonds of Country Telecom.
a. \(100,000 issued at 75.25
b. \)100,000 issued at 103.50
c. \(100,000 issued at 94.50
d. \)100,000 issued at 103.25
2. Which bond will Country Telecom have to pay the most to retire at maturity?Explain your answer.
Determining the present value of bonds payable and journalizing using the effective-interest amortization method
Sleep Well, Inc. is authorized to issue 9%, 10-year bonds payable. On January 1, 2018, when the market interest rate is 10%, the company issues $500,000 of the bonds. The bonds pay interest semiannually.
Requirements
1. How much cash did the company receive upon issuance of the bonds payable? (Round to the nearest dollar.)
2. Prepare an amortization table for the bond using the effective-interest method, through the first two interest payments. (Round to the nearest dollar.)
3. Journalize the issuance of the bonds on January 1, 2018, and the first and second payment of the semiannual interest amount and amortization of the bonds on June 30, 2018, and December 31, 2018. Explanations are not required.
Using the effective-interest amortization method
On December 31, 2018, when the market interest rate is 6%, Benson Realty issues
\(700,000 of 6.25%, 10-year bonds payable. The bonds pay interest semiannually. Benson
Realty received \)713,234 in cash at issuance.
Requirements
1. Prepare an amortization table using the effective interest amortization method for
the first two semiannual interest periods. (Round to the nearest dollar.)
2. Using the amortization table prepared in Requirement 1, journalize issuance of the
bonds and the first two interest payments.
Reporting liabilities on the balance sheet and computing debt toequity ratio.The accounting records of Pack Leader Wireless include the following as ofDecember 31, 2018:
Accounts Payable \( 77,000 Salaries Payable \) 7,500
Mortgages Payable (long-term) 73,000 Bonds Payable (current portion) 25,000
Interest Payable 18,000 Premium on Bonds Payable 10,000
Bonds Payable (long-term) 63,000 Unearned Revenue (short-term) 2,700
Total Stockholders’ Equity 140,000
Requirements
1. Report these liabilities on the Pack Leader Wireless balance sheet, includingheadings and totals for current liabilities and long-term liabilities.
2. Compute Pack Leader Wireless’s debt to equity ratio at December 31, 2018.
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