中级财务会计九.ppt

On the date of acquisition, Masterwear, the bond issuer, will debit cash for $735,533, credit Premium on bonds payable for $35,533, and credit bonds payable for $700,000. At the same time, United (the investor in the bonds) will debit investment in bonds for $700,000, debit Premium on bond investment for $35,533, and credit cash for $735,533. Bonds sold at a premium are sold at an amount above face amount, and bonds sold at a discount are sold at an amount less that face amount. The amortization process writes up (or down) to maturity over the life of the bond. At maturity, the liability for bonds payable is equal to the amount of cash necessary to extinguish the debt. We have accounted for these bonds on previous slides, so we are familiar with the values calculated. For example, on the date of issue the cash paid by United (investor) to Masterwear (issuer) will be $666,633. The total discount is $33,367. Let see the proper accounting when both companies have a October 31 year-end, and interest is paid on June 30, and December 31. The year ended October 31, 2011, is four months from the interest payment date of June 30, 2011. The year-end entry is an accrual; no cash will change hands. Instead the issuer will record interest payable and the investor will record interest receivable. We will recognize the interest for the four-month period of $31,327 (refer to the amortization schedule to calculate this amount). In addition, we will amortize the discount for the four-month period in the amount of $3,327. The issuer will debit interest expense for $31,327 credit discount on bonds payable for $3,327 and credit interest payable for $28,000. The investor will debit interest receivable for $28,000, debit discount on bond investment for $3,327, and credit interest revenue for $31,327. On December 31, the next interest payment date, Masterwear, the issuer, will recognize an additional three months’ interest expense, an additional three months’ discount amortization, re