1. CHAPTER TWENTY-FOUR
CORPORATIONS: BONDS

2. BONDS
Def. - a written promise to pay a specific sum of money at a specific future date.
It is a debt of the corporation
If not paid, creditors can force the company into bankruptcy.
Usually issued in denominations of $1,000 each
Enabling corporation to obtain large amounts of money by selling bonds to many investors
Bonds can be classified as to:
Security
Timing of payment of principal
Identification of ownership

3. Bonds are either secured or unsecured
SECURITY
Bonds are either secured or unsecured
SECURED BONDS
one that is backed by specific corporate assets
Example: Mortgage Bond
UNSECURED BONDS
backed solely by the general credit of the corporation, rather than by specific assets
Also called “Debenture Bonds”

4. TIMING OF PAYMENT OF PRINCIPAL
Principal is to be paid at maturity
TERM BONDS -bonds that all have the same maturity date
SERIAL BONDS - bonds issued in a series so that a specified amount of the bond matures each year
CONVERTIBLE BONDS - bonds that give the holder the option of exchanging the bonds for capital stock of the corporation
CALLABLE BONDS - bonds that give the issuing corporation the option of calling the bonds for redemption before the maturity date

5. IDENTIFICATION OF OWNERSHIP
Principal is to be paid at maturity
REGISTERED BONDS
bonds whose ownership is recorded in the corporate records
name and address of each owner
COUPON BONDS (bearer bonds)
bonds whose ownership generally is not recorded by the corporation
the holder of the bond presents the interest coupons for payment as they come due

6. DETERMINING SALES PRICE
EXAMPLE: Watkin Corp. wants to sell $400,000 of 10%, 10-year bonds.
Two factors affecting price:
1. Stated or Coupon rate of interest on the bond
2. Current Market rate of interest on similar investments
What if the market rate is 11%?

7. DETERMINING SALES PRICE
EXAMPLE: Watkin Corp. wants to sell $400,000 of 10%, 10-year bonds.
Two factors affecting price:
1. Stated or Coupon rate of interest on the bond
2. Current Market rate of interest on similar investments
If our bonds offer only 10% and
other bonds are offering 11%,
investors will not want our bonds.

8. DETERMINING SALES PRICE
EXAMPLE: Watkin Corp. wants to sell $400,000 of 10%, 10-year bonds.
Two factors affecting price:
1. Stated or Coupon rate of interest on the bond
Sell at a
DISCOUNT
2. Current Market rate of interest on similar investments

9. DETERMINING SALES PRICE
EXAMPLE: Watkin Corp. wants to sell $400,000 of 10%, 10-year bonds.
Two factors affecting price:
1. Stated or Coupon rate of interest on the bond
2. Current Market rate of interest on similar investments
If the market rate is only 9%….
bonds will sell at a
PREMIUM.

10. DETERMINING SALES PRICE
EXAMPLE: Watkin Corp. wants to sell $400,000 of 10%, 10-year bonds.
When...
the Selling Price….
Stated Rate =
Market Rate, =
Face Value
Stated Rate
>
Market Rate,
>
Face Value
(Premium)
Stated Rate
<
Market Rate,
<
Face Value
(Discount)

11. ISSUING BONDS AT FACE VALUE
EXAMPLE: On April 1, 20-1 the stated rate of 10% is the same as the current market rate. Watkin Corp. will sell the $400,000, 10-year bonds at face value.
Let’s look at the
issuance journal entry.

12. GENERAL JOURNAL Bonds Payable is reported as a
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Apr. 1
Cash
400,000 2
Bonds Payable
400,000 3
Issued bonds at face value 4 5
Bonds Payable is reported as a
long-term liability on the balance sheet. 6 7 8 9 10 11

13. ISSUING BONDS AT FACE VALUE
EXAMPLE: On April 1, 20-1 the stated rate of 10% is the same as the current market rate. Watkin Corp. will sell the $400,000, 10-year bonds at face value.
Interest Payment:
Face Value x
Stated Interest rate
Since interest payments
are paid every 6 months,
1/2 of the yearly interest
is paid in each payment.
$400,000 x
10%
$40,000/year

14. GENERAL JOURNAL Since the next interest payment will be
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Oct. 1
Bond Interest Expense
20,000 2
Cash
20,000 3
Paid semiannual interest 4
on bonds 5
Since the next interest payment will be
after the year end, we must stop
at year end and record the accrued interest. 6 7 8 9 10 11

15. October 1 - December 31 = 3 months
GENERAL JOURNAL
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Dec. 31
Bond Interest Expense
10,000 2 3 4 5
October 1 - December 31 = 3 months
$400,000 x 10% = $40,000/year
$40,000 x 1/4 year(3 months) = $10,000 6 7 8 9 10 11

16. GENERAL JOURNAL Dec. 31 Bond Interest Expense 10,000
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Dec. 31
Bond Interest Expense
10,000 2
Bond Interest Payable
10,000 3 4 5 6 7 8 9 10 11

17. GENERAL JOURNAL The adjustment is reversed on January 1. Jan. 1
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Jan. 1
Bond Interest Payable
10,000 2
Bond Interest Expense
10,000 3 4
The adjustment is
reversed on January 1. 5 6 7 8 9 10 11

18. ISSUING BONDS AT A PREMIUM
EXAMPLE: On April 1, 20-1 the stated rate of 10% is GREATER than the current market rate, so Watkin Corp. will sell the $400,000, 10-year bonds at 106. x
$400,000
106%
$424,000
Bonds will sell for

19. Bonds Payable is recorded at the FACE VALUE of the bonds.
GENERAL JOURNAL
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Apr. 1
Cash
424,000 2
Bonds Payable
400,000 3 4
Bonds Payable is recorded at
the FACE VALUE of the bonds. 5 6 7 8 9 10 11

20. Premium on Bonds Payable is an adjunct-liability account.
GENERAL JOURNAL
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Apr. 1
Cash
424,000 2
Bonds Payable
400,000 3
Premium on Bonds Pay.
24,000 4 5
Premium on Bonds Payable is
an adjunct-liability account. 6 7 8 9 10 11

21. Balance Sheet (Partial) Bonds Payable + Premium =
Long-term liabilities:
Bonds Payable
$400,000
Premium on Bonds Payable
24,000
$424,000
Bonds Payable + Premium =
Carrying Value

22. ISSUING BONDS AT A PREMIUM
EXAMPLE: On April 1, 20-1 the stated rate of 10% is GREATER than the current market rate, so Watkin Corp. will sell the $400,000, 10-year bonds at 106.
$400,000 x 10% x 1/2 = $20,000 Interest payment
Selling at a premium does
not affect the amount of the
interest payments.

23. ISSUING BONDS AT A PREMIUM
EXAMPLE: On April 1, 20-1 the stated rate of 10% is GREATER than the current market rate, so Watkin Corp. will sell the $400,000, 10-year bonds at 106.
$400,000 x 10% x 1/2 = $20,000 Interest payment
But this is not the Interest Expense
recognized every 6 months.

24. ISSUING BONDS AT A PREMIUM
EXAMPLE: On April 1, 20-1 the stated rate of 10% is GREATER than the current market rate, so Watkin Corp. will sell the $400,000, 10-year bonds at 106.
$400,000 x 10% x 1/2 = $20,000 Interest payment
$24,000
Premium received reduces the amount of interest expense
Premium is amortized
over the life of the bond.

25. AMORTIZING BOND PREMIUM
Two methods of amortizing premiums or discounts:
EFFECTIVE INTEREST
recommended method
covered in the appendix
STRAIGHT-LINE
simple to apply
generally provides acceptable results

26. AMORTIZING BOND PREMIUM
EXAMPLE: On April 1, 20-1 the stated rate of 10% is GREATER than the current market rate, so Watkin Corp. will sell the $400,000, 10-year bonds at 106.
FORMULA:
Premium x
1/2 Year
Life of Bonds
$24,000 x
$1,200
1/2 Year =
10 Years

27. Interest Payment - Amortization of Premium
GENERAL JOURNAL
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Oct. 1
Bond Interest Expense
18,800 2
Interest Payment - Amortization of Premium
$20,000 - $1,200 3 4 5 6 7 8 9 10 11

28. GENERAL JOURNAL Oct. 1 Bond Interest Expense Premium on Bonds Pay.
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Oct. 1
Bond Interest Expense
18,800 2
Premium on Bonds Pay.
1,200 3
Cash
20,000 4
Paid semiannual interest 5
and amortized premium 6 7 8 9 10 11

29. accrued Interest Expense and Premium Amortization
GENERAL JOURNAL
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Dec. 31
Bond Interest Expense
9,400 2
Premium on Bonds Pay.
600 3
Bond Interest Payable
10,000 4 5
At year end, 3 months of
accrued Interest Expense
and Premium Amortization
are recognized. 6 7 8 9 10 11

30. GENERAL JOURNAL Dec. 31 Bond Interest Expense 9,400
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Dec. 31
Bond Interest Expense
9,400 2
Premium on Bonds Pay.
600 3
Bond Interest Payable
10,000 4 5
This entry will be
reversed January 1. 6 7 8 9 10 11

31. PREMIUM AMORTIZATION When the bonds are issued
Interest Expense Debit
Premium on Bonds Payable
Bonds Payable Balance
Premium on Bonds Payable Balance
Carrying Value of Bonds
Cash Credit
Date
4/1/-1
$400,000
$24,000
$424,000
When the bonds are issued
the Carrying Value is $424,000.
$400,000 face value + $24,000 premium

32. PREMIUM AMORTIZATION $1,200 of the Premium is
Interest Expense Debit
Premium on Bonds Payable
Bonds Payable Balance
Premium on Bonds Payable Balance
Carrying Value of Bonds
Cash Credit
Date
4/1/-1
$400,000
$24,000
$424,000
10/1/-1
$18,800
$1,200
$1,200 of the Premium is
amortized every six months.

33. PREMIUM AMORTIZATION The carrying value is reduced
Interest Expense Debit
Premium on Bonds Payable
Bonds Payable Balance
Premium on Bonds Payable Balance
Carrying Value of Bonds
Cash Credit
Date
4/1/-1
$400,000
$24,000
$424,000
10/1/-1
$18,800
$1,200
$20,000
400,000
22,800
422,800
The carrying value is reduced
by $1,200 every six months.

34. PREMIUM AMORTIZATION By the maturity date of the bond,
Interest Expense Debit
Premium on Bonds Payable
Bonds Payable Balance
Premium on Bonds Payable Balance
Carrying Value of Bonds
Cash Credit
Date
By the maturity date of the bond,
the premium is gone and the
carrying value has reached the
face value of the bond.
4/1/-1
$400,000
$24,000
$424,000
10/1/-1
$18,800
$1,200
$20,000
400,000
22,800
422,800
4/1/-2
18,800
1,200
20,000
400,000
21,600
421,600
10/1/-2
18,800
1,200
20,000
400,000
20,400
420,400
4/1/10
18,800
1,200
20,000
400,000
2,400
402,400
10/1/10
18,800
1,200
20,000
400,000
1,200
401,200
4/1/11
18,800
1,200
20,000
400,000
400,000

35. ISSUING BONDS AT A DISCOUNT
EXAMPLE: On April 1, 20-1 the stated rate of 10% is LESS than the current market rate, so Watkin Corp. will sell the $400,000, 10-year bonds at 96. x
$400,000
96%
$384,000
Bonds will sell for

36. Discount on Bonds Payable is a contra-liability account.
GENERAL JOURNAL
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Apr. 1
Cash
384,000 2
Discount on Bonds Pay.
16,000 3
Bonds Payable
400,000 4 5
Discount on Bonds Payable
is a contra-liability account. 6 7 8 9 10 11

37. Balance Sheet (Partial) Bonds Payable - Discount =
Long-term liabilities:
Bonds Payable
$400,000
Discount on Bonds Payable
16,000
$384,000
Bonds Payable - Discount =
Carrying Value

38. ISSUING BONDS AT A DISCOUNT
EXAMPLE: On April 1, 20-1 the stated rate of 10% is LESS than the current market rate, so Watkin Corp. will sell the $400,000, 10-year bonds at 96. x x
$400,000
10%
1/2
$20,000 every 6 months
Interest Payments
Selling bonds at a discount,
does not affect the amount
of interest paid.

39. ISSUING BONDS AT A DISCOUNT
EXAMPLE: On April 1, 20-1 the stated rate of 10% is LESS than the current market rate, so Watkin Corp. will sell the $400,000, 10-year bonds at 96.
$16,000 Discount will be amortized over the life of the bond.
$16,000 x
$800
1/2 =
10 years

40. Discount amortization increases the interest expense.
GENERAL JOURNAL
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Oct. 1
Bond Interest Expense
20,800 2
Discount on Bonds Pay.
800 3
Cash
20,000 4
Paid semiannual interest 5
and amortized discount 6
Discount amortization
increases the interest expense. 7 8 9 10 11

41. accrued Interest Expense and Discount Amortization
GENERAL JOURNAL
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Dec. 31
Bond Interest Expense
10,400 2
Bond Interest Payable
10,000 3
Discount on Bond Pay.
400 4 5
At year end, 3 months of
accrued Interest Expense
and Discount Amortization
are recognized. 6 7 8 9 10 11

42. GENERAL JOURNAL Dec. 31 Bond Interest Expense 10,400
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Dec. 31
Bond Interest Expense
10,400 2
Bond Interest Payable
10,000 3
Discount on Bond Pay.
400 4 5
This entry will be
reversed January 1. 6 7 8 9 10 11

43. DISCOUNT AMORTIZATION
Interest Expense Debit
Discount on Bonds Payable
Bonds Payable Balance
Discount on Bonds Payable Balance
Carrying Value of Bonds
Cash Credit
Date
4/1/-1
$400,000
$16,000
$384,000
10/1/-1
$20,800
$800
$20,000
400,000
15,200
384,800
Every 6 months, the discount is
reduced by $800, causing the
Carrying Value to rise by $800.

44. DISCOUNT AMORTIZATION
Interest Expense Debit
Discount on Bonds Payable
Bonds Payable Balance
Discount on Bonds Payable Balance
Carrying Value of Bonds
Cash Credit
Date
4/1/-1
$400,000
$16,000
$384,000
At the maturity date of the bond,
the discount is gone and the
carrying value is now equal
to the face value.
10/1/-1
$20,800
$800
$20,000
400,000
15,200
384,800
4/1/-2
20,800
800
20,000
400,000
14,400
385,600
10/1/-2
20,800
800
20,000
400,000
13,600
386,400
4/1/10
20,800
800
20,000
400,000
1,600
398,400
10/1/10
20,800
800
20,000
400,000
800
399,200
4/1/11
20,800
800
20,000
400,000
400,000

45. BOND REDEMPTION Corporations may redeem bonds: At maturity date
By paying the face value of the note
Before maturity
By paying the call price if “callable”
Or market price if not callable
Usually results in a gain or a loss
Difference between the amount paid to redeem the bonds and the carrying value of the bonds

46. BOND REDEMPTION
EXAMPLE: Watkin Corp. redeems $40,000 of the $400,000 of bonds that were sold at face value. The $40,000 of bonds were redeemed at 103.
$41,200
$40,000 x
103 =
Watkin will pay $41,200 to
redeem $40,000 of bonds….
$1,200 LOSS

47. What if these bonds had originally been sold at a 106 (Premium)?
GENERAL JOURNAL
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Bonds Payable
40,000 2
Loss on Bonds Redeemed
1,200 3
Cash
41,200 4 5
What if these bonds had originally
been sold at a 106 (Premium)? 6 7 8 9 10 11

48. We must determine how much of the premium remains unamortized
BOND REDEMPTION
To determine if there is a gain or loss, we must compare the Carrying Value at the time of redemption with the amount paid to redeem the bonds.
Carrying Value =
Face Value
Unamortized Premium
$40,000 +
We must determine how much
of the premium remains unamortized
at the date of redemption (8 years later).

49. Bonds were originally sold at
UNAMORTIZED PREMIUM
Bonds were originally sold at
$42,400
$40,000 x 106

50. UNAMORTIZED PREMIUM $42,400 - 40,000 $ 2,400 $ 240 $ 1,920
Bonds were originally sold at
$42,400
Face Value
- 40,000
Premium
$ 2,400
Amortized over ÷ 10
years $
per year x 8
years
Amortized so far
$ 1,920
$2,400 premium - $1,920 amortized so far
= $480 remaining unamortized

51. Carrying Value of $40,480; but cash paid to redeem the bonds is
BOND REDEMPTION
To determine if there is a gain or loss, we must compare the Carrying Value at the time of redemption with the amount paid to redeem the bonds.
Carrying Value =
Face Value
Unamortized Premium
$40,000 +
$480
Carrying Value of $40,480; but
cash paid to redeem the bonds is
$41,200 ($40,000 x 103)….
$720 LOSS

52. GENERAL JOURNAL Bonds Payable 40,000 Premium on Bonds Pay. 480
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Bonds Payable
40,000 2
Premium on Bonds Pay.
480 3
Loss on Bonds Redeemed
720 4
Cash
41,200 5 6 7 8 9 10 11

53. BOND REDEMPTION
EXAMPLE: Watkin Corp. redeems $40,000 of the $400,000 of bonds that were sold at face value. The $40,000 of bonds were redeemed at 97.
$38,800
$40,000 x 97 =
Watkin will pay $38,800 to
redeem $40,000 of bonds….
$1,200 GAIN

54. What if these bonds had originally been sold at 96 (Discount)?
GENERAL JOURNAL
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Bonds Payable
40,000 2
Gain on Bonds Redeem.
1,200 3
Cash
38,800 4 5
What if these bonds had originally
been sold at 96 (Discount)? 6 7 8 9 10 11

55. BOND REDEMPTION $40,000 Carrying Value = Face Value
To determine if there is a gain or loss, we must compare the Carrying Value at the time of redemption with the amount paid to redeem the bonds.
Carrying Value =
Face Value
Unamortized Discount
$40,000 -
We need to determine how much
of the discount remains unamortized
at the time of redemption.

56. Bonds were originally sold at
UNAMORTIZED DISCOUNT
Bonds were originally sold at
$38,400
$40,000 x 96

57. UNAMORTIZED DISCOUNT $38,400 40,000 $ 1,600 $ 160 $ 960
Bonds were originally sold at
$38,400
Face Value
40,000
Discount
$ 1,600
Amortized over ÷ 10
years $
per year x 6
years
Amortized so far
$ 960
$1,600 discount - $960 amortized so far
= $640 remaining unamortized

58. Carrying Value is $39,360; but cash paid to redeem the bonds is
BOND REDEMPTION
To determine if there is a gain or loss, we must compare the Carrying Value at the time of redemption with the amount paid to redeem the bonds.
Carrying Value =
Face Value
Unamortized Discount
$40,000 -
$640
Carrying Value is $39,360; but
cash paid to redeem the bonds is
$38,800 ($40,000 x 97)….
$560 GAIN

59. GENERAL JOURNAL Bonds Payable 40,000 Discount on Bonds Pay. 640
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Bonds Payable
40,000 2
Discount on Bonds Pay.
640 3
Gain on Bonds Redeem.
560 4
Cash
38,800 5 6 7 8 9 10 11

60. BOND SINKING FUNDS Required by the Bond Indenture
written agreement for issuing bonds
Issuer must accumulate and invest funds over a period of years
To provide the amount at maturity

61. Let’s look that the journal entry.
BOND SINKING FUNDS
EXAMPLE: Watkin Corp. is required to make deposits of $30,000 to a trustee each year.
Let’s look that the journal entry.

62. Watkin’s trustee reports earnings of $2,800 for the year.
GENERAL JOURNAL
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Bonds Sinking Fund
30,000 2
Cash
30,000 3 4 5
Watkin’s trustee reports
earnings of $2,800 for the year. 6 7 8 9 10 11

63. Watkin bonds are redeemed at maturity by the trustee….
GENERAL JOURNAL
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Bonds Sinking Fund
30,000 2
Cash
30,000 3 4
Bonds Sinking Fund
2,800 5
Sinking Fund Earnings
2,800 6
Watkin bonds are redeemed
at maturity by the trustee…. 7 8 9 10 11

64. $960 is remaining in the sinking fund after the bonds are redeemed.
GENERAL JOURNAL
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Bonds Sinking Fund
30,000 2
Cash
30,000 3 4
Bonds Sinking Fund
2,800 5
Sinking Fund Earnings
2,800 6 7
Bonds Payable
400,000 8
Bond Sinking Fund
400,000 9
$960 is remaining in the sinking fund
after the bonds are redeemed. 10 11

65. GENERAL JOURNAL Bonds Sinking Fund 30,000 Cash 30,000
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Bonds Sinking Fund
30,000 2
Cash
30,000 3 4
Bonds Sinking Fund
2,800 5
Sinking Fund Earnings
2,800 6 7
Bonds Payable
400,000 8
Bond Sinking Fund
400,000 9 10
Cash
960 11
Bond Sinking Fund
960