1. Corporations and Bonds Payable
Chapter 20 2

2. Journalizing the recording
Learning Objective 1
Journalizing the recording
of bonds as well as
interest payments. 4

3. Learning Unit 20-1 (Structure and Characteristics of a Bond)
Each bond certificate is usually
issued in denominations of $1,000.
Face value
Contract rate
Bond indenture
Trustee

4. Learning Unit 20-1 (Structure and Characteristics of a Bond)
Bonds are 100% if the bond rate
and market interest rate are equal.
Bond discount
Bond premium

5. Learning Unit 20-1 (Structure and Characteristics of a Bond)
Serial bonds
Secured bonds
Debenture bonds
Registered bonds
Callable bonds
Convertible bonds

6. Learning Unit 20-1 (Structure and Characteristics of a Bond)
Issuing bonds is borrowing.
Issuing shares of stock means less
ownership for existing shareholders
(unless they buy the new shares).

7. Learning Unit 20-1 (Structure and Characteristics of a Bond)
Interest on bonds must
be paid each year.
Dividend payments are optional.
Bonds are a long-term liability
on the balance sheet.

8. Learning Unit 20-1 (Structure and Characteristics of a Bond)
Face value × Stated rate × 6/12 = Amount of
interest to be paid in cash each 6 months
Face value × Market rate at issuance date × 6/12
= Amount to be debited to interest expense
every 6 months (effective method) 10

9. Learning Objectives 2 and 3
Amortizing bond discounts
and bond premiums by the
straight-line method and by
the interest method.
Journalizing year-end
adjusting entries for bonds. 4

10. Learning Unit 20-2 (Straight-Line Amortization)
The discount (or premium) is divided by the
number of interest periods for the bond issue
and provides the amount for amortization.

11. Learning Unit 20-2 (Straight-Line Amortization)
Amortization of a discount
increases interest expense.
Amortization of a premium
decreases interest expense.

12. Learning Unit 20-2 (Straight-Line Amortization)
Bonds with a face value of
$200,000 are sold at 97%.
The contract rate of interest is 12%.
The market rate is 12.4%.
Cash ,000
Discount on Bonds Payable 6,000
Bonds Payable ,000

13. Learning Unit 20-2 (Straight-Line Amortization)
Discount amortization = $6,000 ÷ 20 = $300
How much is the interest payable
at the end of period one?
$200,000 × 0.12 × 6/12 = $12,000
How much is the interest expense?
$300 (bond amortization)
+ $12,000 (interest payable) = $12,300

14. Learning Unit 20-2 (Straight-Line Amortization)
Bonds with a face value of
$200,000 are sold at 102%.
The contract rate of interest is 12%.
The market rate is 11.8%.
Cash ,000
Bonds Payable ,000
Premium on Bonds Payable ,000

15. Learning Unit 20-2 (Straight-Line Amortization)
Cash payment is $12,000.
4,000 ÷ 20 = 200
Premium amortization is $200.
Interest expense is $12,000 – $200 = $11,800
What is the journal entry
at the end of period one?

16. Learning Unit 20-2 (Straight-Line Amortization)
Bond Interest Expense 11,800
Premium on Bonds Payable
Cash ,000

17. Learning Unit 20-3 (Interest Method)
The interest method of amortization makes
interest expense a constant percentage
of the bond carrying value. %

18. Learning Unit 20-3 (Interest Method)
Face value × Stated rate × 6/12
= Amount of interest to be
paid in cash each 6 months
Carrying value
× Market rate at issuance date
× 6/12 = Amount to be debited to
Interest Expense every 6 months
The above amounts will be equal
if bonds are sold at 100%.

19. Learning Unit 20-3 (Interest Method)
Assume that Yang Corporation is issuing
$200,000 of 12%, 10-year bonds on April 1.
Interest is to be paid on October 1 and April 1.
The selling price of the bonds is $178,808.
The market rate is 14 %.

20. Learning Unit 20-3 (Interest Method)
What is the interest paid to bondholders
at the end of period one?
$200,000 × 0.12 × 6/12 = $12,000
What is the interest expense?
$178,808 × 0.14 × 6/12 = $12,517
What is the discount amortization?
$517

21. Learning Unit 20-3 (Interest Method)
Bond Interest Expense 12,517
Cash ,000
Discount on Bonds Payable

22. Learning Unit 20-3 (Interest Method)
Assume that on December 31, three months’ interest
of $6,000 for the second period has accrued.
What is the adjusting entry?
Bond Interest Expense 6,276.50
Discount on Bonds Payable
Bond Interest Payable ,000.00

23. Journalizing entries related
Learning Objective 4
Journalizing entries related
to retirement of bonds
and to sinking funds. 4

24. Learning Unit 20-4 (Retirement of Bonds and Sinking Funds)
Bonds are a long-term liability.
Liabilities are paid at maturity (or early).
Amortization must be brought up to
date and interest paid to bondholders.
Maturity value (face value of bonds) is paid.
Some issues require a sinking fund.

25. Learning Unit 20-4 (Retirement of Bonds and Sinking Funds)
Assume that on June 30, Roberts Corporation
retired a $500,000, 10 % bond issue that
had an unamortized premium of $19,000.
The bonds were called in at 105.
What is the journal entry?

26. Learning Unit 20-4 (Retirement of Bonds and Sinking Funds)
Bonds Payable ,000
Premium on Bonds Payable 19,000
Loss on Bond Retirement ,000
Cash ,000
Retirement of bond

27. Learning Unit 20-4 (Retirement of Bonds and Sinking Funds)
Often a corporation will establish a fund that will
accumulate assets over the life of the bond so
as to pay off the bondholders at maturity.
This fund is called a sinking fund.
Accounts Affected Category Rules
Sinking Fund Asset Dr.
Cash Asset Cr.

28. End of Chapter 20