1. Bonds and Long-Term Notes Sid Glandon, DBA, CPA Assistant Professor of Accounting

2. Long-Term Debt  Bonds payable  Long-term notes payable  Mortgages payable  Pension liabilities  Lease liabilities

3. Bonds Payable  Bond indenture Promise to pay principle amount at maturity date Promise to pay periodic interest at stated rate on face (maturity) value

4. Valuation of Bonds Payable  Present value of Principle discounted at market rate Interest (ordinary annuity) discounted at market rate  Sold at a premium Market rate of interest < Stated rate  Sold at a discount Market rate of interest > Stated rate

5. Bonds Issued at a Discount

6. Bonds Issued at a Premium

7. Amortization of Premium or Discount  Amortization of premium Reduces interest expense  Amortization of discount Increases interest expense

8. Bonds Issued between Interest Dates  Buyer pays seller for accrued interest up to the date of purchase  Purchaser receives full interest payment on the interest payment date

9. Example: Bonds Issued between Interest Dates

10. Effective Interest Method  Bond interest expense Multiply carrying value of bonds times effective interest rate  Bond interest paid Multiply face amount of bonds times stated interest rate  Amortization of premium or discount Subtract interest paid from interest expense

11. Bond Issue Price

12. Journal Entry to Record Issue

13. Amortization Schedule

14. Bond Issue Costs  Record as deferred charge (asset) “Unamortized Bond issue costs”  Amortize over the life of the bonds Use of straight-line method is ok

15. Journal Entry for January 1, 2002 Interest Payment

16. Extinguishment of Debt  Before maturity date of bonds  Amortization must be brought current Discount Premium Unamortized bond issue costs  Gain or loss is classified as separate line item, part of ordinary income

17. Long-Term Notes Payable  Valued as the present value of Future principle payments, and Future interest payments  Premium or discount is amortized over life of loan

18. Types of Long-Term Notes  Interest-Bearing Notes Issued at par Issued at less than market rate  Zero-Interest-Bearing Notes Calculate discount Amortize discount as interest expense for each period over the life of the loan

19. Zero-Interest-Bearing Note

20. Journal Entry

21. Amortization Schedule