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

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Presentation on theme: "Bonds and Long-Term Notes Sid Glandon, DBA, CPA Assistant Professor of Accounting."— Presentation transcript:

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


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