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LONG-TERM LIABILITIES 16 Financing expansion Smaller Amounts bank loan lease Larger Amounts stock issue bond issue
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Bond Basics Advantages of bonds over stock current stockholders retain control tax savings EPS increases if new expansion yields a good return Disadvantages of bonds over stock cash is needed to pay bond interest and principal higher risk loan agreements might prohibit bonds
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Bearer bonds Convertible bonds Secured bonds 2003 2004 2002 Serial bonds Bond Terminology
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$1,000 REGISTERED Minnesota Manufacturing & Mining Corporation 8.5% Due July 1, 2013 Face value Contractual interest rate Maturity date Bond Certificate
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$1,000 REGISTERED 8.0% Example: $1,000, 8% bond Annual interest = $80 Matures in 1 year 8% Market Interst Rate Market Price Principal and Interest in 1 year 100$1,000 $1,000 + 8%($1,000) = $1,080 10%98.2$982 $982 + 10%($982) = $1,080 6%101.9$1,019 $1,019 + 6%($1,019) = $1,080 Bond Trading
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Accounting for Bonds issuing bonds redeeming bonds at maturity Make sure you know journal entries:
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Other Long-Term Liabilities Cash Payment Interest Expense (10%) Reduction of Principal Balance 1/1/01$7,000 1/1/02$ 2,815$ 700 1/1/03 1/1/040
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Cash Payment Interest Expense (10%) Reduction of Principal Balance 1/1/01$7,000 1/1/02$ 2,815$ 700$ 2,1154,885 1-1-02Made payment on note payable.
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