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Published byElisabeth O’Neal’ Modified over 8 years ago
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Bonds and Long-Term Notes Sid Glandon, DBA, CPA Assistant Professor of Accounting
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Long-Term Debt Bonds payable Long-term notes payable Mortgages payable Pension liabilities Lease liabilities
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Bonds Payable Bond indenture Promise to pay principle amount at maturity date Promise to pay periodic interest at stated rate on face (maturity) value
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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
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Bonds Issued at a Discount
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Bonds Issued at a Premium
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Amortization of Premium or Discount Amortization of premium Reduces interest expense Amortization of discount Increases interest expense
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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
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Example: Bonds Issued between Interest Dates
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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
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Bond Issue Price
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Journal Entry to Record Issue
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Amortization Schedule
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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
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Journal Entry for January 1, 2002 Interest Payment
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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
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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
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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
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Zero-Interest-Bearing Note
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Journal Entry
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Amortization Schedule
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