bonds payable
DESCRIPTION
CHAPTER 17. BONDS PAYABLE. 1,000. Bonds. Firm. Bond Certificate. Investor. Bonds. A bond is a security, usually long-term, representing money borrowed by a corporation from the investing public. The face value of the bond is $1,000 or some multiple of $1,000. Bond Certificate. - PowerPoint PPT PresentationTRANSCRIPT
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BONDS PAYABLE
CHAPTER 17CHAPTER 17
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Bonds Bonds
1,000
Bond Certificate
Investor
Firm
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Bonds Bonds
A bond is a security, usually long-term, representing money borrowed by a corporation from the investing public.
Bond Certificate
The face value of the bond is $1,000 or some multiple of
$1,000.
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Bonds Bonds
The total number of bonds that are issued at one time is called a bond issue.
$10,000 bond issue
$1,000 bond
$1,000 bond
$1,000 bond $1,000 bond $1,000 bond $1,000 bond $1,000 bond $1,000 bond $1,000 bond
$1,000 bond
The specific terms of a bond issue are specified in a bond indenture.
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Bond Indenture Bond Indenture
Bond indenture
Maturity dateInterest payment dates
Interest rateRepayment plans
restrictions
RightsPrivileges
Limitations
It generally determines whether there is a company call the debt, and what is the preference in liquidation in the event of corporate failure.
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Interest Rate and Market Interest Interest Rate and Market Interest RateRate
Face interest rate
market interest rate
It is the rate of interest paid to the bondholders based on the face value or
principal of the bonds
The market interest rate is the rate of interest paid in the market by bond investors for bonds of similar risk.
as close as possible to
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Interest Rate and Market Interest Interest Rate and Market Interest RateRate
Face interest rate ≠ market interest rate
Market interest rate ＞ Face interest rateThe issue price ＜ Face value
The bonds are to be issued at a discount.
Market interest rate ＜ Face interest rateThe issue price ＞ Face value
The bonds are to be issued at a premium.
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Interest Rate and Market Interest Interest Rate and Market Interest RateRate
To illustrate, let’s
look at an example
…
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Interest Rate and Market Interest Interest Rate and Market Interest RateRate
Let’s assume that Anderson Company issues 5-year, 8% bonds. Bonds have a $1,000 face value, and pay interest every six months.
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Interest Rate and Market Interest Interest Rate and Market Interest RateRate
If the market interest rate is 8% when Anderson Issues its 8% bonds,
1,000 $40 every six months
INVESTORS
At maturity date, they will also get their $1,000 investment back.
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Interest Rate and Market Interest Interest Rate and Market Interest RateRate
If the market interest rate is 10% when Anderson Issues its 8% bonds,
INVESTORS
At maturity date, they will also get their $1,000 investment back.
$40 every six months
Purchase at a discountThe discount equals the excess of
face value over issue price.
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Interest Rate and Market Interest Interest Rate and Market Interest RateRate
If the market interest rate is 6% when Anderson Issues its 8% bonds,
INVESTORS
$40 every six months
At maturity date, they will also get their $1,000 investment back.
Pay a premiumThe premium is equal to the excess of the issue rice over the face value.
.
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Bonds Issued at Face ValueBonds Issued at Face Value
Bonds Bonds Issued Issued atat
Face ValueFace Value
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Bonds Issued at Face ValueBonds Issued at Face Value
Suppose that Anderson Company has issued 100 of its 5-year 8 percent bonds at face value on April 1, 20X0. Interest is paid on October 1 and April 1 of each year.
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Bonds Issued at Face ValueBonds Issued at Face Value
The entry
April 1, 20X0 Cash $100,000
Bonds Payable $100,000
October 1 of each year
Interest Expense 4,000
Cash 4,000
Interest was paid in full through
October 1.
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Bonds Issued at Face ValueBonds Issued at Face Value
Dec. 31 from 20X0 to 20X4
Interest Expense 2,000
Interest Payable 2,000
The year-end entry must be prepared to reflect the accrual of interest for October through December.
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Bonds Issued at Face ValueBonds Issued at Face Value
April 1, 20X5 Bonds Payable 100,000
Cash 100,000
April 1 from 20X1 to 20X5
Interest Expense 2,000
Interest Payable 2,000
Cash 4,000
When the next interest payment date arrives on April 1, the actual interest payment will cover the previously accrued interest, and additional amounts pertaining to January, February, March and April.
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Bonds Issued at a DiscountBonds Issued at a Discount
Bonds Bonds Issued Issued atat
a Discounta Discount
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Bonds Issued at a DiscountBonds Issued at a Discount
Suppose Anderson issues 100 of 5-year, 8% bonds at $92,278 on January 1, 20X0 when the market interest rate is 10%. The interest will be paid on July 1 and January 1 of each year.
Anderson will have to repay a total of $140,000, which consists of the $4,000 every 6 months for five years and $100,000 at maturity.
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Bonds Issued at a DiscountBonds Issued at a Discount
Anderson $92,278 ＋ $47,722 Investor
This $47,722 must be
spread over 10 six-month
periods.
$140,000
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Bonds Issued at a DiscountBonds Issued at a Discount
Thus, the $4,000 periodic interest payment is increased by $772.20 of discount amortization each period.
Discount ＝
$10,000 － $92,278
?Discount ＝ ＝ $7,722
The total cost is increased by the $7,722 discount.
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Bonds Issued at a DiscountBonds Issued at a Discount
The entry
Jan. 1, 20X0 Cash $92,278
Discount on Bonds Payable 7,722
Bonds Payable $100,000
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Bonds Issued at a DiscountBonds Issued at a Discount
July 1 and January 1 each year
Interest Expense 4,772
Discount on Bonds Payable 772
Cash 4,000
Dec. 31,20X5 Bonds Payable 100,000
Cash 10,000
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Bonds Issued at PremiumBonds Issued at Premium
Bonds Bonds Issued Issued atat PremiumPremium
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Bonds Issued at PremiumBonds Issued at Premium
Suppose that Anderson issues 100 of the 5-year, 8% bonds at $108,530 on February 1, 20X1 when the market interest rate is 6%. The interest will be paid on July 1 and January 1 of each year.
Anderson will have to repay a total of $140,000, which consists of the $4,000 every 6 months for five years and $100,000 at maturity.
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Bonds Issued at PremiumBonds Issued at Premium
Anderson $108,530 ＋ $31,470 Investor
$ 140,000
This $31,470 must be
expensed over 10 six-month
periods.
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Bonds Issued at PremiumBonds Issued at Premium
Premium＝?Premium $108,530 － $100,000 ＝ ＝ $8,530
Total borrowing cost is reduced by the $8,530 premium .
Thus, the $4,000 periodic interest payment is reduced by $853 of premium amortization each period.
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Bonds Issued at PremiumBonds Issued at Premium
The entry
Jan. 1,20X1 Cash $108,530
Premium on Bonds Payable $8,530
Bonds Payable 100,000
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Bonds Issued at PremiumBonds Issued at Premium
July 1 and January each year
Interest Expense 3,147
Premium on Bonds Payable 853
Cash 4,000
Dec. 31, 20X6 Bonds Payable 100,000
Cash 100,000
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WE ARE SAILING RIGHT ALONG!!