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CHAPTER 17. BONDS PAYABLE. 1,000. Bonds. Firm. Bond Certificate. Investor. Bonds. A bond is a security, usually long-term, representing money borrowed by a corporation from the investing public. The face value of the bond is $1,000 or some multiple of $1,000. Bond Certificate.
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CHAPTER 17 BONDS PAYABLE
1,000 Bonds Firm Bond Certificate Investor
Bonds A bond is a security, usually long-term, representing money borrowed by a corporation from the investing public. The face value of the bond is $1,000 or some multiple of $1,000. BondCertificate
Bonds The total number of bonds that are issued at one time is called a bond issue. $10,000 bond issue $1,000 bond $1,000 bond The specific terms of a bond issue are specified in a bond indenture. $1,000 bond $1,000 bond $1,000 bond $1,000 bond $1,000 bond $1,000 bond $1,000 bond $1,000 bond
Bond Indenture Rights Privileges Limitations Bond indenture It generally determines whether there is a company call the debt, and what is the preference in liquidation in the event of corporate failure. Maturity date Interest payment dates Interest rate Repayment plans restrictions
Interest Rate and Market Interest Rate It is the rate of interest paid to the bondholders based on the face value or principal of the bonds Face interest rate as close as possible to market interest rate The market interest rate is the rate of interest paid in the market by bond investors for bonds of similar risk.
Interest Rate and Market Interest Rate ≠ Face interest rate market interest rate Market interest rate ＞Face interest rate The issue price＜Face value The bonds are to be issued at a discount. Market interest rate ＜Face interest rate The issue price＞Face value The bonds are to be issued at a premium.
Interest Rate and Market Interest Rate To illustrate, let’s look at an example …
Interest Rate and Market Interest Rate Let’s assume that Anderson Company issues 5-year, 8% bonds. Bonds have a $1,000 face value, and pay interest every six months.
1,000 Interest Rate and Market Interest Rate If the market interest rate is 8% when Anderson Issues its 8% bonds, $40 every six months INVESTORS At maturity date, they will also get their $1,000 investment back.
Interest Rate and Market Interest Rate If the market interest rate is 10% when Anderson Issues its 8% bonds, Purchase at a discount The discount equals the excess of face value over issue price. $40 every six months INVESTORS At maturity date, they will also get their $1,000 investment back.
Interest Rate and Market Interest Rate If the market interest rate is 6% when Anderson Issues its 8% bonds, Pay a premium The premium is equal to the excess of the issue rice over the face value. . $40 every six months INVESTORS At maturity date, they will also get their $1,000 investment back.
Bonds Issued at Face Value Bonds Issued at Face Value
Bonds Issued at Face Value Suppose that Anderson Company has issued 100 of its 5-year 8 percent bonds at face value on April 1, 20X0. Interest is paid on October 1 and April 1 of each year.
Bonds Issued at Face Value The entry April 1, 20X0 Cash $100,000 Bonds Payable $100,000 October 1 of each year Interest Expense 4,000 Cash 4,000 Interest was paid in full through October 1.
Bonds Issued at Face Value Dec. 31 from 20X0 to 20X4 Interest Expense 2,000 Interest Payable 2,000 The year-end entry must be prepared to reflect the accrual of interest for October through December.
Bonds Issued at Face Value April 1 from 20X1 to 20X5 Interest Expense 2,000 Interest Payable 2,000 Cash 4,000 April 1, 20X5 Bonds Payable 100,000 Cash 100,000 When the next interest payment date arrives on April 1, the actual interest payment will cover the previously accrued interest, and additional amounts pertaining to January, February, March and April.
Bonds Issued at a Discount Bonds Issued at a Discount
Bonds Issued at a Discount Suppose Anderson issues 100 of 5-year, 8% bonds at $92,278 on January 1, 20X0 when the market interest rate is 10%. The interest will be paid on July 1 and January 1 of each year. Anderson will have to repay a total of $140,000, which consists of the $4,000 every 6 months for five years and $100,000 at maturity.
Bonds Issued at a Discount $140,000 $92,278 ＋$47,722 Investor Anderson This $47,722 must be spread over 10 six-month periods.
Bonds Issued at a Discount ? Discount ＝ $7,722 Discount $10,000－ $92,278 ＝ ＝ The total cost is increased by the $7,722 discount. Thus, the $4,000 periodic interest payment is increased by $772.20 of discount amortization each period.
Bonds Issued at a Discount The entry Jan. 1, 20X0 Cash $92,278 Discount on Bonds Payable 7,722 Bonds Payable $100,000
Bonds Issued at a Discount July 1 and January 1 each year Interest Expense 4,772 Discount on Bonds Payable 772 Cash 4,000 Dec. 31,20X5 Bonds Payable 100,000 Cash 10,000
Bonds Issued at Premium Bonds Issued at Premium
Bonds Issued at Premium Suppose that Anderson issues 100 of the 5-year, 8% bonds at $108,530 on February 1, 20X1 when the market interest rate is 6%. The interest will be paid on July 1 and January 1 of each year. Anderson will have to repay a total of $140,000, which consists of the $4,000 every 6 months for five years and $100,000 at maturity.
Bonds Issued at Premium $ 140,000 $108,530＋$31,470 Investor Anderson This $31,470 must be expensed over 10 six-month periods.
Bonds Issued at Premium ? Premium ＝ Premium $8,530 $108,530 － $100,000 ＝ ＝ Total borrowing cost is reduced by the $8,530 premium . Thus, the $4,000 periodic interest payment is reduced by $853 of premium amortization each period.
Bonds Issued at Premium The entry Jan. 1,20X1 Cash $108,530 Premium on Bonds Payable $8,530 Bonds Payable 100,000
Bonds Issued at Premium July 1 and January each year Interest Expense 3,147 Premium on Bonds Payable 853 Cash 4,000 Dec. 31, 20X6 Bonds Payable 100,000 Cash 100,000
