ACCT 3 Chp 10

Warranties

• contingent liability = uncertainty

Estimate: % X amount sold X avg cost

Debit Product Warranty Exp xxx

Credit Estimated Warranty Liability xxx

Warranty thats actually used:

Debit Estimated Warranty Liability xxx

Credit Cash/supplies xxx

Discount on Bonds

Contractual Rate < Market rate

Issue price < Face value

jounral entry for each period:

Debit Interest Expense xxx

Credit Cash and Discount xxx

Carrying Value = face value - unamortized discount

Interest Paid = CR X FV

Interest expense > interest paid

Amortization = +

Effective Interest method: Discount and Premium

TABLE TIME!

1st column: periods and dates

2nd column: interest expense recorded - MR X CV

3rd column: interest paid - CR X FV

4th column: discount amortization = 1st - 2nd

5th column: carrying value - start with issue price

• check your work! interest expense recorded added all together should = total cash inflows - total cash outflows

• discount amortization should be positive and added to carrying value to continue to next row, and premium amortization should be negative and subtracted from carrying value

• at the end it should end at the FV

Total Interest Expense equation

total cash inflows(positives) - total cash outflows(negatives)

Issuance of Bond with Discount

Debit Cash (issue price) and Unamortized Discount (FV- issue price)

Credit Bonds Payable = FV

Issuing a Bond with Premium

Debit Cash (issue price)

Credit Bonds Payable = FV and Unamortized Premium (FV-issue price)

Premium on Bonds

Contractual Rate > Market Rate

Issue price > Face Value

Journal entry for each period:

Debit Interest expense and premium

Credit cash

Carrying value = bond payable + unamortized premium

Interest Paid = CR X FV

Interest Expense < interest paid

Amortization = -

Find Issue Price using the calculator

N = number of periods

I = market rate

PV = present value (what you’re looking for)

PMT = pmt per month

FV = future value

Semiannual Bonds

divide market rate and contractual rate by 2

multiply periods if they are in years by 2

Retirement of Bond: premium

Cash Paid (%) X Face Value = how much we paid to get rid of bond

Debit Bond Payable (FV) and Premium (difference between CV and FV)

Credit Cash (amount paid)

Gain or Loss = CV - CP

Debit Loss (-)

Credit Gain (+)

Retirement of Bonds: Discount

Cash Paid X FV = how much we paid to get rid of bond

Debit Bonds Payable (FV)

Credit Discount (FV and CV difference) and Cash (CP X FV)

Gain or Loss = CV - CP

Debit Loss (-)

Credit Gain (+)