Intermediate AccT

Running Head : Intermediate Accounting

Name

University

Course

Tutor

Date :Intermediate Accounting

Case 1

A (i ) Usually , selling /issuing , price of bonds is determined by using the discounting factor method of the future benefits that would accrue due to the bonds investment . Unlike straight-line-method that assumes equal yearly amortization , the effective amortization method uses different premiums to calculate for the selling price . It involves the process of discounting (i .e . taking the possible cash flows that accrues in the future in terms of its present value . It involves

the use of market interest rate to discount the value of the bonds . i .e (Principal x market interest , 5 years

Since this is the five years , divided by ten (to cater for the semi-annual discharge of interest divides it

The price of the bonds will be equivalent to the principal amount plus the sum of the semi-annual interest benefits that may have accrued to that period . i .e

Price principal (p x semi-annual interest ) where

is the value representing the number of semi-annuals (ii ) Balance sheets of bonds will contain the value of bonds payable , which represents the value of the bonds when they were purchased . Any statement of redemption that should explain any loss effect on bonds will be entered as a debit

B . Balance sheet as at 31st Dec 2008 , should include interest revenue that may have accrued to the bonds , any possible loss that may have occurred during the trading of the bond capital market and the value of the gain resulting from interest elimination . Either it should also show the value of the bond carrying state . The interest is calculated by discounting the principal value of the bonds over one year . The value of the bond is shown by the principal plus the value of its interest (Bolten 2000 ,

.129 , par 4

c ) There is a general decrease in income by using effective amortization in every successive year in the period of bonds maturity This would explain that the amortization would be lower in the second or third year of the life of bond issue

If bonds are not redeemed , then their income continues to decrease in its life span every year after its purchase . The transaction in bond amortization like any other business transaction involves a buyer and a seller (The issuer and the redeemer . To the issuer , he has balance sheet that shows the value of bonds that are payable to him . To the buyer he has a balance sheet showing capital investment in bonds During normal bond redemption case of bonds using effective amortization method , consolidation requires that bonds are to be redeemed in their purchase through open market . Discount in amortization arises as been negative due to the negative impact /interest in the interest revenue that accrues over time and the interest expense . Interest expense occurs due to the cost /expense acquired through selling the bonds . Since the interest 's expense overrides the interest revenue , the difference is a lower in the...