Week 2 Homework Essay

Submitted By Tmstone1
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Accounting 410 – Week 6 Solution Document
Name: Tina Marie Stone
Pr. 8-3. (6 points) Review of amortization of interest on bonds
To understand Pr. 8-3, you need to understand how to amortize discounts or premiums on bonds using the effective interest method. If bonds are issued at a discount, interest expense is higher than the amount of interest paid. Here is an example. Entries shown below would be reflected in the government-wide statement of net assets.
Illustration. The town of Brookfield issued $10 million in 5-year bonds at 92.277 (i.e., 92.277% of par). The stated interest rate was 8% per annum, or a semi-annual rate of 4%. On the date the bonds were issued, the market interest rate was 10% (5% semi-annual rate). Market interest rate is also called the yield. The entry to record the issue of bonds is:
DR Cash $9,227,700 Discount on Bonds Payable 772,300 CR Bonds Payable $10,000,000 The bonds have a carrying value of ($10,000,000 - $772,300 = $9,227,700. Six months later, the 1st interest payment is made. Interest paid is 4% of $10 million, or $400,000. Interest expense is calculated based on market rate and the carrying value of the bonds. It is $9,227,700 * 5% = $461,385. The journal entry to record interest expense, amortization of the discount and the 1st interest payment is: DR Interest Expense $461,385 CR Cash $400,000 Discount on Bonds Payable 61,385

Now update the carrying value of the bonds payable. It is

$9,227,700 + 61,385 = $9,289,085.

To record payment of the 2nd interest expense, amortization and interest payment, calculate interest expense as $9,289,085 * 5% = $464,454.25 (rounded to $464,454). The 2nd 6-month JE is:

DR Interest Expense $464,454 CR Cash $400,000 Discount on Bonds Payable 64,454

Every six months, after the discount is amortized, the carrying value must be updated. At the end of the 5-year period, the discount would have a balance of zero, and the carrying value of the bonds would be $10 million, or the face/par value.

The method illustrated above is the Effective Interest Amortization approach. Your journal entries for Pr. 8-3 Part 1 will look like these journal entries, but of course the amounts are going to be different.
8-3 Part one Journal entries for Government wide statements.
Cash 89.322m
Bond discount 10.678m Bonds Payable 100.00m
The issuance of bonds
Interest Expense 3.126m Cash 3.000m Bond discount 0.126m 1st period interest expense
Interest Expense 3.131m Cash 3.000m Bond discount 0.131m 2nd period interest expense
Journal entries for Part 2 (fund entries) will only show the amounts of proceeds and interest paid out. DR Cash, CR Other Financing Sources – Bond Proceeds for issuance and DR Interest Expenditures and CR Cash for interest payment. HINT: Here, think about how much cash was received and then how much cash was paid out in interest.
Part 2
Governmental Fund Statements:
Cash 89.322m Other financing sources- bond proceeds 89.322m Issuance of bonds
Interest expenditure 3.000m Cash 3.000m 1st period interest expenditure
Interest expenditure 3.000m Cash 3.000m 2nd period interest expenditure

Problem 8-5 (5 points). Here is a table you can use. It has some check figures in it.

General Fund | Government-wide Statements | 1. Expenditure | 6.6million | Expense | 7.7million | Increase in debt | 0 | Increase in debt | 1.1million | 2. Expenditure | 0.5 | Expense | 0 | Increase in debt | 0 | Increase in debt | 0.5 | 3. Expenditure | 10.0million | Expense | 20.0million | Increase in debt | 0 | Increase in debt | 10 million | 4. Expenditure | 0 | Expense | 0 | Increase in debt | 0 | Increase in debt | 99.7 | 5. Expenditure | 4.0million | Expense | $3M | Increase in debt | 0 |