ACCT 4A(12.4-12.6)
Effective Interest Amortization Method
This method computes interest expense based on the carrying amount of the bond and the market rate at issuance. Notice the order used when using the method: -Cash Paid(Face Value x Interest Rate) - Interest Expense(Carrying Amount x Market Interest Rate) - Discount Amortized(Interest Expense-Cash Paid)
Debt To Equity Ratio
If the debt to equity ratio is greater than 1, then the company is financing more assets with debt than with equity. If the ratio is less than 1, then the company is financing more assets with equity than with debt. The higher the debt to equity ratio, the greater the company's financial risk. = Total Liabilities/Total Equity
Deciding Between Calling A Bond Or Purchasing It.
If the market price lower than the carrying amount of the bonds payable the business would want to buy, otherwise, the business would want to call. The journal entry removes the bonds from the books and records a gain on retirement. If the bonds being retired have a premium rather than a discount, any existing premium would be removed with a debit.[12.4]
Retirement of Bonds at Maturity
In this case, the carrying value will ALWAYS equal the face value.
Notice The Balance Sheet
Look at the image. All of the liabilities are reported at book value. You list current liabilities first and then the long-term liabilities.
Retirement Of Bonds
Retirement of bonds payable involves paying the face value of the bond. Bonds can be retired at the maturity date or before.
Retirement of Bonds Before Maturity
The main reason for retiring bonds early is to relieve the pressure of paying the interest payments. Some bonds are callable, which means the company may call, or pay off, the bonds at a specified price. The call price is usually 100 or a few percentage points above face value, perhaps 101 or 102, to provide an incentive to the bondholder. When retiring bonds before maturity, follow these steps: - Record partial-period amortization of discount or premium and partial-period interest payment if the retirement date does not fall on an interest payment date. - Remove the portion of unamortized Discount or Premium that relates to the bonds being retired. - Debit Bonds Payable at face value. - Credit a gain or debit a loss on retirement. - Credit Cash for amount paid to retire the bonds.
