Professional Documents
Culture Documents
April 1
Cash
2,349,850
Bonds Payable
1,000,000
Mortgage Payable
1,349,850
Or DR Cash 1,000,000 & CR Bonds Payable 1,000,000
DR Cash 1349850 & CR Mortgage Payable 1349850 (if shown as separate JE)
B: loan repayment schedule
Month
beginning
1 May 2014
Beg. Balance
Payment
Interest
1
Ending
balance
3
1,332,419
1,349,850
28,680
28,680
11103.49
17,577
1,314,842
1 July
1,314,842
28,680
10957.02
17,723
1,297,119
1 August
1,297,119
28,680
10809.33
17,871
1,279,249
1 June
1,332,419
11248.75
Principal
reduction
2
17,431
C: general JE for interest repayments & necessary adjustments up to 31 July 2014 (w/end of financial year 30 June)
Mortgage:
JE (note values rounded to nearest dollar):
May 1
June 1
July 1
Interest Expense
Cash
11249
Interest Expense
Cash
11103
Interest Payable
Cash
10957
Interest Expense
Interest Payable
10957
Interest Expense
Interest Payable
10809
Interest Payable
Cash
20000
Interest Expense
Interest Payable
20000
11249
11103
10957
AJE:
June 30
July 31
10957
10809
Debentures:
JE:
July 1
20000
AJE:
June 30
20000
Interest Expense
6667
Interest Payable
1 July to 31 July = 1 month accrued interest since last payment
Interest payable = .08*1mil*1/12 = 6666.67 = interest expense
6667
2) July 1 2011issue 2.7 million face value, 9%, 10-year bonds at 2,531,760 (effective IR = 10%)
Effective-interest method to amortize bond discount
Bonds pay semi-annual interest July 1 & Jan 1
a)
9% contract rate, 10% discount rate (bonds issued at discount)
r = 10/2 = 5%
n = 10 x 2 = 20 periods
- Present value of principle to be received at maturity = 0.37689*2.7 million = 1,017,603
- PV interest to be received periodically over term of bonds = 12.46221*(9%*2.7mil*6/12) = 1,514,158.5
Therefore, total PV of bonds = 938190.195+1657557 = 2531762.5 = 2,531,760 (rounded)
July 1
Cash
Bonds Payable
2,531,760
2,531,760
b)
Total interest expense recognised over life of bonds = $2,598,240
Working:
Semi-annual interest
periods
July 1 2011 issue
Jan 1 2012
Interest to be paid
Interest Expense to be
recorded
Discount Amortisation
121500
(.09*2.7mil*.05)
121500
126588
(.05*2531760)
126842.4
5342.4
2536848
(5088+2531760)
2542190
121500
127109.5
5609.52
2547800
121500
127390
5889.996
2553690
121500
127684.5
6184.496
2559874
121500
127993.7
6493.721
2566368
121500
128318.4
6818.407
2573187
121500
128659.3
7159.327
2580346
121500
129017.3
7517.293
2587863
10
121500
129393.2
7893.158
2595756
11
121500
129787.8
8287.816
2604044
12
121500
130202.2
8702.207
2612746
13
121500
130637.3
9137.317
2621884
14
121500
131094.2
9594.183
2631478
15
121500
131573.9
10073.89
2641552
16
121500
132077.6
10577.59
2652129
17
121500
132606.5
11106.47
2663236
18
121500
133161.8
11661.79
2674898
19
121500
133744.9
12244.88
2687142
20
121500
134357.1
12857.12
2700000
2430000
2598240
168239.6
July 1 2012
Totals
5088
Interest Expense
Interest Payable
Bonds Payable
July 1 to Sept 30 = 3 months
Interest Payable = 0.09 * 2.7mil * 3/12 = 60750
Interest Expense = 2,531,760 * 0.1 * 3/12 = 63294
63294
2. Jan 1
60750
63294
Interest Payable
Interest Expense
Bonds Payable
Cash
Oct 1 to Jan 1 = 3 months
Interest Payable = 60750
Interest expense = 63294
60750
2544
2544
121500
d)
1. Dec. 31
Interest Expense
Interest Payable
Bonds Payable
July 1 to Dec 31 = 6 months
Interest Payable = .09*2.7mil*6/12 = 121500
Interest expense = 2531760*.1*6/12 = 126588
126588
2. Jan. 1
121500
Interest Payable
Cash
3. July 1
Interest Expense
Bonds Payable
Cash
Jan 1 to July 1 = 6 months
Interest Payable = .09*2.7mil*6/12 = 121500
Interest expense = 2531760*.1*6/12 = 126588
121500
5088
121500
126588
5088
121500
e) After interest paid July 1 2012, redeems. MIR = 0.12. CIR = 0.09
1. Price Matlock must pay to redeem bonds: $2261471
2. July 1
Bonds Payable
2542190
2
Gain on Bond Redemption
280719
1
Cash
2261471
1
Bonds payable as at July 1, 2012.
PV of principle if redeemed at July 1, 2012: r=0.06 (since now 12% MIR), n=18 (2 periods consumed, hence value
to pay today (redemption) with 18 remaining periods)
= 2700000*.35034 = 945918
PV of interest if redeemed at July 1, 2012:
= 10.8276*(9%*2.7mil*6/12) = 1315553.4
Total = 2261471.4 (rounded = 2261471)
2
Gain = 2542190 (carrying value on redemption date) 2261471 (price of bonds on redemption)
= 280719
3. Using residual analysis, a gain would not be an asset, as the business has no present control over the gain
which means one of the four criteria is not met. A loss would not be a liability, as there is no past event which leads
to this loss. Therefore, a gain/loss would be classified as other income or expense (with a gain being recognised as
income & loss as expense) in the SOCI since neither is an owner contribution/distribution. The gain/loss has
resulted from financing business operations, which is why it has been classified under other income and expenses
(and not other comprehensive income), and not other comprehensive income.