Acct 201 ch.10
cash interest paid
(par value x contract rate)/ 2 (semiannual)
most common long-term liabilities
1. Notes Payable (due in more than 1 year) 2. Mortgages payable 3. Bonds Payable usually paid off in installments
selling price of 88 1/2
88.5% of given par value
Investor who owns bond
Bond Holders/creditors/lenders
The company
Bond Issuer/Debtor/Borrower
registered bonds
Bonds issued in the names and addresses of their holders
Enviro Company issues 10%, 10-year bonds with a par value of $240,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 12%, which implies a selling price of 88 1/2. Record the issue of bonds with a par value of $240,000
Dr. cash (240,000 x 0.885.) $212,400 Dr. Discount on bond payable $26,450 Cr. Bonds Payable $230,000
A company issues $500,000 of 6%, 10-year bonds dated January 1, 2017 that mature on December 31, 2026. The bonds pay interest semiannually on June 30 and December 31 each year. If bonds are sold at par value, the issuer records the sale with which of the following entries?
Dr. to Cash $500,000 Cr. to Bond Payable $500,000
Disadvantages of bond financing for a company
a. A business earns a lower return with the funds from the bond than it pays in interest. b. Requires payments of both periodic interest and par value at maturity. d. Large payments of par value are made at maturity. f. Unlike equity ownership, a par value payment is required at a specified date.
premium on bonds
amount by which the bond price exceeds the par value market rate < the bond contract rate
Maturity Value or Par Value
amount that the corporation is legally required to pay back to the bondholders when the bond comes due + periodic interest
discount on bonds payable
bond's issue price < face value company issues bonds with a contract rate < the market rate contra liability account with normal debit balance
bearer or unregistered
bonds payable to whomever holds them
Advantages of bond financing for a company
c. Unlike distributions to owners, bond interest payments are tax deductible. e. Interest on bonds is tax deductible.
convertible bonds
can be exchanged for a fixed number of shares of the issuing corporation's common stock
A company issues $75,000 of 6%, 10-year bonds dated January 1 that pay interest semiannually on each June 30 and December 31. If the issuer accepts $69,000 for the bonds, the issuer will record the sale with a debit to which of the following accounts?
cash and discount on bonds payable
unsecured bonds
debentures; are backed by the issuer's general credit standing and are risker than secured debt
bond contract rate
determines annual interest paid; bond par value MULTIPLE contract rate
record interest expense that will reduce principal
equal payments - interest expense
bond discount increases_ at each semi-annual interest payment
interest expense
A company borrows $70,000 by signing a $70,000, 8%, 6-year note that requires equal payments of $15,142 at the end of each year. The first payment will record interest expense of $5,600 and will reduce principal by $9,542. The journal entry to record this transaction will include a debit to which of the following accounts and for how much?
interest expense $5600 Notes payable $9542
total bond interest expense
interest payments (cash interest paid) PLUS the bond discount
contract rate
interest rate specified, sometimes referred to as the coupon rate, stated rate, or nominal rate; contract rate on bonds>market rate = bond sells at a higher price than par value
mortgage
legal agreement that helps protect a lender if a borrower does not make required payments on notes or bonds; right to be paid from cash proceeds, homes & plant assets
bond indenture
legal contract b/w the bondholders and the issuer
installment note
liability requiring a series of payment to the lender
serial bonds (bonds)
mature at more than one date (often in series); repaid over a number of periods
term bonds (and notes)
mature on specified date
callable bonds
option exercisable by the issuer to retire them at a stated dollar amount before maturity
bond carrying (book) value
par value - discount on bonds payable
bond discount
par value MINUS cash proceeds (par value MULTIPLE selling price)
Most bonds require _ value to be repaid at maturity and _ to be paid semiannually
par, interest
issue price
percentage of par value
On the balance sheet when long term notes and mortgages come due within the year
portion moves from Long-Term Liabilities to Current Liabilities
sinking fund bonds
reduces the holder's risk by requiring the issuer to set aside assets at specified amounts and dates to repay the bonds
secured bonds (and notes)
specific assets of issuer pledged (or mortgaged) as collateral
bond issue
the sale of bonds, usually $1,000 or $5,000 often bought and sold amount investors at market value price
