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22-2 Long-Term Bonds Section 1: Financing Through Bonds Chapter 22 Section Objectives 1.Name and define the various types of bonds. 2.Explain the advantages and disadvantages of using bonds as a method of financing.

22-3 Secured or unsecured Registered or unregistered Single-maturity or serial-maturity Types of Bonds Name and define the various types of bonds Secured and Unsecured Secured: specific property pledged as collateral. Unsecured: backed only by a company’s general credit. Unsecured bonds are known as debentures Objective 1

22-4 Registered and Unregistered Registered: issued to a particular purchaser listed in the corporation’s records. Unregistered (coupon): transferred by delivery; coupons attached for each interest payment. Single-Maturity and Serial-Maturity Single-maturity: Bonds mature on the same day. Serial-maturity: Bonds are payable over a period of years. Types of Bonds

22-5 The market interest rate is the interest rate a corporation is willing to pay and investors are willing to accept at the current time. The face interest rate refers to the contractual interest rate specified on the bond. Interest Rates

22-6 Capital StockBonds Payable Permanent Capital No debt to repay. Debt Must be repaid. Advantages and Disadvantages of Using Bonds as a Method of Financing Explain the advantages and disadvantages of using bonds as a method of financing Objective 2

22-7 Capital StockBonds Payable Stockholders’ Equity Common stock has no legal requirement for dividends. Preferred stock requirements depend on contract. Dividends are not deductible for income tax purposes. Long-term liabilities Interest must be paid on the bonds. Interest is a deductible expense. Advantages and Disadvantages of Using Bonds as a Method of Financing

22-8 Capital StockBonds Payable Preference dividends on preferred stock are usually slightly higher than interest rates on bonds because there is more risk associated with preferred stock. Interest rates on bonds are usually slightly lower than dividends on preferred stock. Advantages and Disadvantages of Using Bonds as a Method of Financing

22-9 Long-Term Bonds Section 2: Bond Issue and Interest Chapter 22 Section Objectives 3.Record the issuance of bonds. 4. Record the payment of interest on bonds. 5.Record the accrual of interest on bonds. 6.Compute and record the periodic amortization of a bond premium. 7.Compute and record the periodic amortization of a bond discount.

22-10 On April 1, 2013, Charbo Corporation sells $50,000 ($1,000 x 50) of its 10-year bonds at face value for cash Bonds Issued at Face Value 2013 Apr. 1Cash 50, % Bonds Payable, , Issued bonds at face value Record the issuance of bonds Objective 3

22-11 Payment of Interest On October 1, 2013, the interest for six months at 10 percent becomes due on the $50,000 of bonds issued. ($50,000 X 10% X 6/12 = $2,500) 2013 Oct. 1 Bond Interest Expense 2, Cash 2, Paid semiannual bond interest Record the payment of interest on bonds Objective 4

22-12 The issuing corporation must write off, or amortize, the premium over the period from date of issue of the bonds until date of maturity. If the face rate on the bonds exceeds the market rate of interest at the time the bonds are issued, the bonds will be issued at a premium. Amortizing the premium reduces the interest expense over the period the bonds are outstanding. Bond Premium

22-13 Bonds Issued at a Discount 2016 Apr. 1Cash 48, Discount on Bonds Payable 1, % Bonds Payable, , Issue bonds at Compute and record the periodic amortization of a bond discount Objective 7

22-14 Carrying Value of Bonds Formula Bonds Payable + Premium on Bonds – Discount on Bonds Carrying Value Carrying value is also known as book value

22-15 Long-Term Bonds Section 3: Bond Retirement Chapter 22 Section Objectives 8.Record the transactions of a bond sinking fund investment. 9.Record an increase or decrease in retained earnings appropriated for bond retirement. 10.Record retirement of bonds payable.

22-16 The bond contract might require that retained earnings are appropriated while the bonds are outstanding Retained Earnings Appropriated for Bond Retirement Record an increase or decrease in retained earnings appropriated for bond retirement Objective 9

22-17 Corporation could have surplus cash, so bonds are retired early. Interest rate decreases could result in an early retirement of bonds. Early Retirement of Bonds

22-18 QUESTION: What is the total book value to be removed? $49,040 $50,000 face value 960 discount book value Face value – discount REMINDER: Gain or loss is the difference between book value of bonds retired and what is paid for them ANSWER: