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ORGANIZ I NG A PARTNERSHI P Net income 70,000 Dividing income when Inc. N. inc. 50,000 ADMISSION OF A PARTNER ISSUINGBONDSAT PAR ISSUING BONDSAT DISCOUNT Entry to rec int payment and amortiz Jan 11 Cash 7000 Salary Allowances exceeds allowances, the int Salary Allw Purchase of a Partnership Interest 1/1/09 Cash 800,000 12/31 Cash 96,454 2010-11 Bond Int Exp 4,887 Facilities 33,000 Zayn 36,000 allowances is agreed upon Z. 36,000 Jan 4. Perez, Cap 13,000 Bonds, Pay. 800,000 Disc on Bonds Pay. 3,546 6/30+ Disc on Bond Pay 887 Note Payable 10,000 Perez 24,000 payment on fixed %of each P. 24,000 Rasheed, Cap 13,000 sold bonds at par Bonds Pay. 100k 12/31 Cash 4,000 K. Zayn, Cap. 30,000 Interest Allowances partners beginning year beg. Int. Allo.Rec. admiss. of rasheed by purch. 6/30 Bond Int Exp. 36,000 Sold bonds at disc on issue date Record investment of partner 1 Zayn (10%x30k) 3,000 year capital balance Z. 3,000 Jan 4. Cash 22,000 Cash 36,000 INTERESTCOMPUTION(2 methods) Semiannual Unmortized Carrying Jan 11 Cash 10,000 Perez (10%x10k) 1,000 P. 1,000 Rasheed, Cap 22,000 Pd. Semianual interest (A) Amt repaid to bondholders Period End Discount Value H. Pere, Cap. 10,000 Total Sal and Int 39,000 25,000 64,000 Dividing income when Sal and Int. 39,000 25,000 64,000 Rec admis. of rasheed by invest, (9% x 800k x ½year) 4 int. payments of $4k 16,000 12/31/09 3,546 96,454 Record investment of partner 2 Balance of Income 6,000 allowances exceed income, Bal of inc. (14,000) Jan 4 Cash 42,000 12/31/28 Bonds Payable par val at maturity 100,000 6/30/10 2,659 97,341 ALLOCAT INCOME TO PARTNRS Bal. divided equally again both are paid agreed Divided equ. Rasheed Cap. 30,000 Cash Total 116,000 12/31/10 1,772 98,228 Agreed stated ratio allocation Zayn 3,000 upon salaries Z. (7,000) Zayn Cap (12k/2) 6,000 pd bond princ maturity Lessamt borrowed (96,454) 6/30/11 885 99,115 12/31 Inc Sumary 60,000 Perez 3,000 P. (7,000) Perez Cap (12k/2) 6,000 The example aboce is a800k Total Bond Interest Expense 19,546 12/31/11 0 100,000 Zayn, Cap 40,000 Total Allocated 6,000 ALLOCATIONON SERVICES Total (14,000) Rec admission of Rash and bonus bond issued for 20yrs @9% (B) Four payments of 4k 16,000 Bond Total Int Exp 19,546 Perez, Cap 20,000 Balance of Income 0 CAPITAL, AND STATED Bal of inc. 0 Bond Sets Market Sets Price Determined CR<MR=Disc. Plus Discount 3,546 Int Exp = # of periods = 4 Income of each pt. 42,000 18,000 RATIOS Inc. of each 32,00018,000 Contract Rate(CR) Mkt Rate (MR) CR>MR=Premium; CR=MR= Par Total Bond Int Exp 19,546 $ 4,887 BOND PRICING (Present Value of a discount bond) (Present Value of a Premium Bond) Present BONDRETIREMENT ISSUINGBONDSAT PREMIUM Entry to record int payment and amort. Present Present Cash Flow Table PVC Amt Value Bond Retirement- at Maturity -Before Maturity 12/31 Cash 103,546 2010-11 Bond Int Exp. 5113 Cash Flow Table Val Factor Amount Value 100k par (maturity) B.1 0.8227x 100k= 82,270 12/31 Bonds Payable 100,000 7/1 Bonds Payable 100,000 Premium on bonds pay 3,546 6/30+ Prem on Bonds Pay 887 100k par (maturity) value B.1 0.8227 x 100,000=82,270 6,000 interest payments B.3 3.5460x 6k = 21,276 Cash 100,000 Premium of Bonds Pay. 4,500 Bonds Payable 100,000 12/31 Cash 6000 4,000 interest payments B.3 3.5460 x 4,000=14,184 Price of Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103,546 Rec. retiremtnt of bonds at mat. Gain on B. Retiremnt 1,500 Sold bonds t a prem on issue date STRAIGHTLINE AMORTIZATIONOF Price of Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,454 Cash 103,000 INTERESTCOMPUTATION(2 methods) BONDPREMIUM INTERESTPAYMENTSON BONDS C-Corporation – Corporation that does not qualify nor elect to be treated as a proprietership (A) Amt repaid to bondholders Semiannual Unamortized Carrying 2010-2011 Bond Interest Expense 4887 2010-2011 Bond Interest Expense 5113 General Partner – Partner who assumesunlimited liability for the debts and credits of trans. Four interest payments of 6k 24,000 Period-End Premium Value 6/30+12/31 Discount on Bonds Payable 887 6/30+12/31 Premium on Bonds Pay 887 General Partnership – Partnership in which all partners have mutual agency and unlimited Par value at maturity 100,000 12/31/09 3,546 103,546 Cash 4000 Cash 6000 liability for partnerships LLP – Partnership in which a partner is not personally liable for Total 124,000 6/30/10 2,659 102,659 To record semiannual int + disc amortization To record semiannual int +prem amortization malpractice or negligence unless that partner is responsible for providing the service that results Lessamt borrowed (103,546) 12./31/10 1,772 101,772 in the claim Limited Partners – Partners who have no personal liability for partnership debts beyond the amounts they invested in the partnership Limited Partnership –Partnership that has two classesof Total Bond Interest Expense 20,454 6/30/11 885 100,885 partners, limited partners and general partners Mutual Agency – Legal relationship among partners whereby each partner is an agent of the partnership and is able to bind the partnership to contracts (B) Four payments of 6k 24,000 12/31/11 0 100,000 within the scope of the partnerships business PartnerReturn on Equity – Partner net income divided by average partner equity for the period Partnership – Unincorporated association of two or more LessPremium (3,546) persons to pursue a businessfor profit as co-owners Partnership Contract – Agreement among partners that sets terms under which the affairs of the partnership are conducted; articles of partnership Total Bond Int Exp 20,454 Partnership Liquidation – Dissolution of partnership by (1) selling noncash asets and allocating any gain or loss according to partner’s income and loss ratio (2) paying liabilities and (3) distributing any remaining cash acccording to partners capital balances Statement of Partner’s Equity – Financial statement that shows total capital balances at the beginning of the period, any additional investments by partners, the income or loss of the period, the partner’s withdrawals, and the partners ending capital balances Unlimited Liability – Legal relationship among general partners that makes each of them responsible for partnership debts if the other partners are unable to pay their shares. Annuity –Series of equal payments at equal intervals Bearer Bonds – Bonds made payable to whoever holds them Bond- Written promise to pay the bond’s par value and interest at a stated contract rate; often issued in denomincations of 1,000 Bond Certificate – Document containing bond specifiecs such as an issuers name, bond par value, contract interest rate, and maturity date Bond Indenture – Contract between the bond issuer and the bondholders; identifies the partie’s rights and obligations Callable Bonds – Bonds that give the issuer the option to retire them at a stated amount prior to maturity Capital Leases – Long-term leasesin which the lessor transfers substantially all risk and rewards of ownership to the lesseeCarrying Value of Bonds – Net amount at which bonds are reported on the balance sheet, equals the par value of the bonds less any unamortized discount or plus any unamortized premium Contract Rate – Interest rate specified in a bond indenture; ,multiplied by the par value to determine the interest paid for each period Convertible Bonds – Bonds that bondholders can exchange for a set number of the issuers shares Coupon Bonds – Bonds with interest coupons attached to their certificatesl bondholders detach coupons when they mature and present them to a bank or broker for collection Debt to Equity Ratio – Defined as total liabilities divided by total equity Discount on Bonds Payable – Difference between a bond’s par value and its lower issue price or carrying value; occurs when the contract rate is less than the market rate Effective Interest Method –Allocates interest expense over the bond life to yield a constant rate of interest, interest expense for a period is found by multiplying the balance of the liability at the begininning of the period by the bond market rate at issuance Installment Note – Liability requiring a series of periodic payments to the lender Lease – Contract specifying the rental of a property Market Rate – Interest Rate that borrowers are willing to pay and lenders are willing to accept for a specific lending agreement given the borrowers risk level Mortgage – Legal loan agreement that protects a lender by giving the lender the right to be paid from the cash proceeds from the sale of a borrowers assets Off Balance Sheet Financing – Aqucisition of assets by agreeing to liabilities not reported on the balance sheet Operating Leases –Short term leasesin which the lessor retains risks and rewards of ownership Par Value of a Bond – Amount the bond issuer agrees to pay at maturity and the amount on which cash interest payments are based Pension Plan – Contractual agreement between an employer and its employees for the employer to provide benefits to employees after they retire Premium on Bonds – Difference between a bond’s par value and its higer carrying value; occurs when the contract rate is higher than the market rate Registered Bonds – Bonds owned by investors whose names and addressesare recorded by the issuer Secured Bonds – Bonds that have specific assets of the issuer pledged as collateral Serial Bonds – Bonds consisting of separate amounts that mature at different dates Sinking Fund Bonds – Bonds that require the issuer to make deposits to a separate account; bondholders are repaid at maturity from that account Straight Line Bond Amortization – Method allocating an equal amount of bond interest expense to each period of the bond life Unsecured Bonds – Bonds backed only by the issuers credit standing; almost always riskier than secured bonds; called debetures



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