1. 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).

2. Effective Interest Method
The effective interest method for bonds provides for cash interest payments and an ‘amortization’ of the discount (or premium) over the term of the bond so that the bond payable account equals face value at maturity.
Steps:
Step 1: Calculate Interest Payment (actual credit to Cash account)
Face Value * Stated Interest * Time Period
Step 2: Calculate Interest Expense (Actual debit to Expense account)
Carrying Amount * Market Interest * Time Period
Step 3: Difference between Interest Payment and Interest Expense is either credited (discount) or debited (premium) to Bonds Payable.
Step 4: Calculate new carrying amount after discount or premium is amortized.

3. 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 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.
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4. Example 1 – Bonds issued at ___________

5. Example 2 – Bonds issued at ___________

6. Example 3 – Bonds issued at ___________

7. Installment Notes
Each installment payment includes both interest and principal:
Calculate the amount that represents interest expense.
Step 1 - Calculated as Carrying Value * annual interest rate * time (x/12)
Calculate the amount that represents a reduction of the outstanding loan balance.
Step 2 - Subtract the monthly interest from the total payment and the remainder is a principal reduction.
RC Enterprises obtains a $25,000, 6%, four-year loan for a truck on January 1, 2012.
Payments of $ (principal and interest) are required at the end of each month for 48 months.
We record the note and the first two monthly payments as:
Each installment payment includes both an amount that represents interest and an amount that represents a reduction of the outstanding loan balance. The periodic reduction of the balance is enough that at maturity the note is completely paid.
RC Enterprises obtains a $25,000, 6%, four-year loan on January 1, Payments of $ are required at the end of each month for 48 months.
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8. Final In-class Problem
UCF’s bicycle vending company is expanding and taking over other Florida Universities (USF, UF, FSU, etc.), so they need $ for expansion…. They contact their bank and investment banker and investigate a loan or a bond issuance. Prepare the journal entry for the first interest payment on both options. Which option should UCF take?
Loan $100,000 at 5% interest over a 10 year period. Monthly cash payment = $1,061
Term Debenture bond face value = $100,000, stated interest = 5%, but market interest in now 5.5%. Term = 10 years. Cash received at issuance = $99,000