Check-ups The most common bond characteristics are a serial or term bond that is secured or unsecured? (Circle the two correct answers in bold) A bond.

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Presentation transcript:

Check-ups The most common bond characteristics are a serial or term bond that is secured or unsecured? (Circle the two correct answers in bold) A bond issued at a discount will have a market rate that is higher or lower than the stated rate on the bond. (Circle the one correct answers in bold). If a bond issuance with a face value of $1,000 has an issue price of 98, how much cash will the organization receive at the time of issuance?

Bonds issued at Par Par - stated interest rate equals the market interest rate. The bond is issued for face value of bonds. Therefore, the amount of cash the organization receives from lenders (investors) will equal the face value of the bonds. Steps for original issuance: Debit Cash for amount received Credit Bonds Payable for amount of cash received. Steps for semi-annual interest payments: Calculate ‘cash’ interest payments using stated rate and our typical formula. Debit Interest Expense Credit Cash Steps for final repayment of bond at maturity to lenders (investors): Debit Bonds Payable for face value of bond Credit cash for amount of repayment.

Issuance of a bond at a Discount/Premium Discount – stated interest rate is below the market interest rate. The bond is issued for less than the face value of bonds. Therefore, the amount of cash the organization receives from lenders (investors) will be less than the face value of the bonds. Steps for original issuance: Debit Cash for amount received Credit Bonds Payable for amount of cash received. Steps for semi-annual interest payments: Use the ‘Effective Interest Rate Method” Steps for final repayment of bond at maturity to lenders (investors): Debit Bonds Payable for face value of bond Credit cash for amount of repayment.

Effective Interest Method The effective interest method for bonds provides an ‘amortization’ of the discount (or premium) over the term of the bond so that the bond payable account equals face value at maturity. Very important – ‘CASH’ interest payments to investors are in differing amounts than the ‘INTEREST EXPENSE’ we record semi-annually. Steps: Calculate ‘Cash Interest Payment’ (Credit to Cash account) Formula - Face Value * Stated Interest * Time Period Calculate amount recorded as ‘Interest Expense’ (Debit the expense account) Formula - Carrying Value * Market Interest * Time Period Difference between Interest Payment and Interest Expense is either Credited (discount) or Debited (premium) to Bonds Payable. Calculate new carrying value after discount or premium is amortized.

Examples 1-1-12: $200,000 of bonds issued with a stated interest rate of 9%. Interest due semi-annually. Due in 10 years Market Rate = 9%. Record the bond issue on 1-1-12 and the first 2 interest payments on 6/30/12 and 12/31/12. Market Rate = 10%. Record the bond issue in the amount of $187,538 on 1/1/12 and the first 2 interest payments on 6/30/12 and 12/31/12. Market Rate = 8%. Record the bond issue in the amount of $213,590 on 1/1/12 and the first 2 interest payments on 6/30/12 and 12/31/12. Companies report many long-term liabilities other than bonds payable. In this section, we briefly discuss two of them: installment notes and leases. 9-5

Example 1

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Example 3