1. Chapter 10: Bonds Payable Non-Current Liabilities –Due more than one year from balance sheet date –Currently maturing bonds payable need to be transferred to current liability status When issued two obligations occur –Payment of periodic interest (Annuity) –Payment of principal when due (1 payment)

2. Issue Price of Bonds Depends on the difference between the interest rate stated on the bonds and the issue date market rate of interest If the same, issue price is the same as maturity value (payback amount) If stated rate is greater than market rate, issue price is a premium If market rate is greater than stated rate, issue price is a discount

3. Bond Issue Price Determination Use market interest rate and number of payments to determine factors from present value tables Issue price is the sum of: –Present value of periodic interest payments (factor * interest payment) –Present value of the one payment at maturity (factor * maturity value)

4. Ex 10-15:Bond Issue Price Example Principal and maturity value-$1,000 Stated interest rate-9%; Market-11% Interest payable annually Issue date-January 1, 2003 (3 Years) PV of Interest (2.4437 * $90 = 219.93) PV of Payment (.7312 * $1,000=731.20) Proceeds = $219.93 + 731.20 = $951.13

5. Adjustment of Interest Paid to Interest Expense Annually Two methods may be used –Effective Interest: Multiply beginning book value of bonds by market rate of interest –Straight line: Divide total discount or premium at issuance by number of interest payments and adjust an equal amount each interest payment date Difference in market rate and paid rate is then amortized from book value of bonds