Bonds Payable are long-term liabilities

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Presentation transcript:

Bonds Payable are long-term liabilities We will walk through some examples to demonstrate the Accounting issues surrounding bonds

Bond Specifics Companies obtain financing for large projects through the sale of bonds. The sale of bonds do not affect corporate ownership percentages. Bonds are an attractive purchase because the interest paid on a bond is tax free and paid twice a year. Bonds carry a par or face value. The bond issuer agrees to pay back the face value of the bond at maturity. Additionally, bonds carry an annual, stated rate of interest half of which is paid twice a year to the bond holder

Bond Specifics Bonds are traded on the open market and, thus, their stated rate of interest may be the same as the market rate but more likely it will be higher than the market or lower than the market. When the interest rate is the same as the market the bonds sell at par value When the interest rate is higher than the market, the bonds sell at a premium because the bond rate is more attractive to investors. If the bond rate is 10% and the market rate is 8%, then investors will gravitate to the bonds. When the interest rate is lower than the market, the bonds will sell at a discount because the bond rate is less attractive to investors. If the bond rate is 6% and the market rate is 8%, then investors will purchase but only if they can buy the bond at less than face value.

$800,00, 20yr, 9% Bond issued at par

Issuing Bonds Between Interest Dates If bonds are sold after the issue date, the bond purchaser must pay the interest related to the bond in addition to the bond face value. For example, if 60 days have passed since a $100,00, 9% bond was issued and $1,500 of interest has been earned, the bondholder pays When interest is paid on the bond, the JE is This is done for administrative purposes for the bond issuers to avoid confusion if there are numerous bond purchases on various dates

$100,000, 2yr, 12% Bond – Sells at Premium – Market Rate is 10% Bond is issued at 103.546%

$100,000, 2yr, 8% Bond – Sells at Discount – Market Rate is 10% Bond is issued at 96.454%

Bond Retirement Before Maturity When bonds are sold or otherwise retired before maturity, the carrying value of the bond must be taken into consideration. The carrying value of the bond is the stated face value of the bond and the general ledger balance in the bond premium or bond discount account added together.