1. Accounting for Bonds Payable*
Shing-Jen Wu

2. Accounting for Bond Issues
 Issuing Bonds
 Bonds are the most common type of long-term debt.
 They are usually issued in denominations of $1,000.
 A bond indenture is a promise (by the lender to the borrower) to pay:
 a sum of money at the designated date
 periodic interest at a stipulated rate on the face value

3. Accounting for Bond Issues
 Valuation of Bonds: Determining Bond Prices
 Market value is a function of the three factors that determine present value:
 the dollar amounts to be received
 the length of time until the amounts are received
 the market rate of interest

4. Accounting for Bond Issues
 Valuation of Bonds: Determining Bond Prices
The price of a bond issue is determined by:
 the present value of the interest payments, and
 the present value of the face value,
Both discounted at the market (effective) rate of interest at date of issue.
 Interest payments by borrower are calculated as:
Face value of bond issue x Stated (face) rate of interest

5. Accounting for Bond Issues
 Valuation of Bonds: Determining Bond Prices
Example: Candy Corporation
Given:
Face value of bond issue: $100,000
Term of issue: years
Stated interest rate: % per year, payable
annually end of the year
Market rate of interest: 10% Q:
 How much is the issue price of the bonds?
 How about the bond prices if the market rate is 12% or 8%?

6. Accounting for Bond Issues
 Present Value Concepts
Present Value
Principal
100,000 1 2 3 4 5
Interests
$10,000
10,000
10,000
10,000
10,000

7. Accounting for Bond Issues
 Present Value Concepts—Principal
$100,000 x = $68,058
Principal Payment
Factor
Present Value

8. Accounting for Bond Issues
 Present Value Concepts—Interest
$10,000 x = $39,927
Interest Payment
Factor
Present Value

9. Accounting for Bond Issues
 Interest Rates and Bond Prices

10. Accounting for Bond Issues
 At the Date of Issuance
1° at face value
2° at a discount
3° at a premium

11. Accounting for Bond Issues
 At the Date of Interest Payment
 If bonds issued at Face Value
Assume that interest is payable semi-annually
on January 1 and July 1. The entry is:
$100,000 × 10% × 6/12 = $5,000

12. Accounting for Bond Issues
 At the Date of Interest Payment—Straight-Line Method
 Amortizing Bond Discount

13. Candy Corporation

14. Accounting for Bond Issuesd
 At the Date of Interest Payment—Straight-Line Method
 Amortizing Bond Premium

15. Candy Corporation

16. Accounting for Bond Issues
 At the Date of Interest Payment—Effective-Interest Method
 Amortizing Bond Discount

17. Candy Corporation

18. Accounting for Bond Issues
 At the Date of Interest Payment—Effective-Interest Method
 Amortizing Bond Premium

19. Candy Corporation

20. Accounting for Bond Issues
 Statement Presentation
Candy Corporation
6,211
$ 93,789
Candy Corporation
6,732
$ 106,732