Financial Accounting: In an Economic Context

PROBLEMS

P11-1

Computing the face value of a note payable

On December 31, 2011, East Race Kayak Club decided to borrow $20,000 for two years. The Bend Bank currently is charging a 10 percent effective annual interest rate on similar loans.

REQUIRED:

a. Assume that the club borrows $20,000 and signs a two-year note with a 10 percent stated annual interest rate. What would be the face amount of the note payable?

b. Assume that the club borrows $20,000 and signs a two-year note with a stated annual interest rate of zero. What would be the face amount of the note payable?

c. Prepare the journal entry to record the note payable, assuming that the club signs

(1) the note in (a).

(2) the note in (b).

d. Prepare the entries necessary on December 31, 2013, assuming that the club signs

(1) the note in (a) (interest payable on December 31).

(2) the note in (b).

P11-2

Accounting for bonds with an effective rate greater than the stated rate

Hartl Enterprises issued ten $1,000 bonds on September 30, 2011, with a stated annual interest rate of 8 percent. These bonds will mature on October 1, 2021, and have an effective rate of 10 percent. Interest is paid semiannually on October 1 and April 1. The first interest payment will be made on April 1, 2012.

REQUIRED:

a. Without computing the present value of the bonds, will they be issued at par value, at a discount, or at a premium? Explain your answer. ...