ACCT 200 Ch 10

Issuing Bonds at a Discount EXAMPLE: Assume that on January 1, 2017, Candlestick Inc. sells $100,000, 5 year, 10% bonds at 98 (98% face value) with interest payable annually on Jan. 1. The entry to record the issuance is:

(98% is the market rate) Jan 1. Dr. Cash 98,000 (100,000 x .98) Dr. Discount on Bonds Payable 2,000 Cr. Bonds Payable 100,000

Issuing Bonds at Face Value EXAMPLE: devon corporation issues 100, 5 year, 10%, $1,000 bonds dated January 1, 2017, at 100 (100% of face value), with interest payable annually each Jan. 1. Write the journal entries to record... (THE SALE) Jan. 1, 2017 (The entry to accrue interest) Dec. 31, 2017 (The payment of interest) Jan. 1, 2018

(THE SALE) Jan. 1, 2017 Dr. Cash 100,000 Cr. Bonds Payable 100,000 (The entry to accrue interest) Dec. 31, 2017 (100,000 x 10% x 12/12 = 10,000) Dr. Interest Expense 10,000 Cr. Interest Payable 10,000 (The payment of interest) Jan. 1, 2018 Dr. Interest Payable 10,000 Cr. Cash 10,000

the current market price (present value) of a bond is a function of 3 factors:

1. the amount to be received (principal & interest) 2. the length of time until amounts are received 3. the market rate of interest

when does a corporation record bond transactions?

1. when it issues (sells) or redeems (buys back) bonds 2. when bondholders convert bonds into common stock

Issuing Bonds at a Premium EXAMPLE: Gomez Company issued $380,000, 7%, 10 year bonds on Jan. 1, 2014, for $407,968. This price resulted in an effective interest rate of 6% on the bonds. Interest is payable annually on January 1. What is the carrying value of the bond on Jan. 1, 2015?

380,000 + (27,968 - 2,122 = 25,846) = $405,846

Issuing Bonds at a Discount EXAMPLE: Cole Corp. issued $400,000. 7%, 20 year bonds on January 1, 2014 for $360,727. This price resulted in an effective-interest rate of 8% on the bonds. Interest is payable annually on January 1. Cole uses the effective interest method to amortize bond premium or discount What is the carrying value of the bond on Jan. 1, 2015

400,000 - 38,415 (discount on B/P balance) = $361,585

Unearned Revenue EXAMPLE: Superior University sells 10,000 season football tickets at $50 each for its 5 game home schedule. The entry for the sales of season tickets is:

Aug. 6: (10,000 x 50 = 500,000) Dr. Cash 500,000 Cr. Unearned Ticket Revenue 500,000

Issuing Bonds at a Discount EXAMPLE: Riot Company issued $500,000, 15 year, 7% bonds at 96% (face value) Explain why the bonds sold at a price below the face amount

Bonds sold at a discount because contractual interest rate (%)

Current Liabilities Notes Payable EXAMPLE: First National Bank agrees to lend $100,000 on Sept. 1, 2014, if Cole Williams Co. signs a $100,000, 12%, 4 month note maturing on Jan. 1. Record the issuances of the note payable from Cole Williams Co's perspective. If Cole Williams Co. prepares financial statements annually, it makes an adjusting entry at December 31 to recognize interest

Dec. 31, 2014: (100,000 x 12% x 4/12 = 4,000) Dr. Interest Expense 4,000 Cr. Interest Payable 4,000

Mortgage Payable EXAMPLE: Nance Co. receives $280,000 when it issues a $280,000, 6%, mortgage note payable to finance the construction of a building at Dec. 31, 2014. Then terms provide for semiannual installment payments of $14,285 on June 30 and Dec. 31. Issuance of the Note:

Dec. 31, 2014: Dr. Cash 280,000 Cr. Mortgage Payable 280,000

Issuing Bonds at a Discount EXAMPLE: Cole Corp. issued $400,000. 7%, 20 year bonds on January 1, 2014 for $360,727. This price resulted in an effective-interest rate of 8% on the bonds. Interest is payable annually on January 1. Cole uses the effective interest method to amortize bond premium or discount Record the accrual of interest and the discount amortization on Dec. 31, 2014

Dec. 31, 2014: Dr. Interest Expense (360,727 x 0.08 market rate) 28,858 Cr. Interest Payable (400,000 x 0.07 contract rate) 28,000 Cr. Discount on Bonds Payable 858

Issuing Bonds at a Premium EXAMPLE: Gomez Company issued $380,000, 7%, 10 year bonds on Jan. 1, 2014, for $407,968. This price resulted in an effective interest rate of 6% on the bonds. Interest is payable annually on January 1. Record the accrual of interest and the premium amortization on Dec. 31, 2014

Dec. 31, 2014: Dr. Interest Expense (407,968 x 6%) 24,478 Dr. Premium on Bonds Payable 2,122 Cr. Interest Payable (380,000 x 7%) 26,600

Mortgage Payable EXAMPLE: Nance Co. receives $280,000 when it issues a $280,000, 6%, mortgage note payable to finance the construction of a building at Dec. 31, 2014. Then terms provide for semiannual installment payments of $14,285 on June 30 and Dec. 31. Second Installment Payment:

Dec. 31, 2015: (280,000 - 5,885 = 274,115) Dr. Interest Expense (274,115 x 6% x 6/12) 8,223 Dr. Mortgage Payable 6,062 Cr. Cash 14,285

Long Term Notes Payable EXAMPLE: Porter Technology issues a $500,000, 8%, 20 year mortgage note on Dec. 31, 2017. The terms provide for annual installment payments of $50,926. Record the mortgage loan and first installment payment:

Dec. 31, 2017: Dr. Cash 500,000 Cr. Mortgage Payable 500,000 Dec. 31, 2018: Dr. Interest Expense 40,000 Dr. Mortgage Payable 10,426 Cr. Cash 50,926

Long Term Notes Payable EXAMPLE: Porter Technology issues a $500,000, 8%, 20 year mortgage note on Dec. 31, 2017. The terms provide for annual installment payments of $50,926. Record the second installment payment:

Dec. 31, 2019: Dr. Interest Expense 39,126 Dr. Mortgage Payable 11,800 Cr. Cash 50,926

Redeeming Bonds at Maturity Example: Candlestick records the redemption of its bonds at maturity as follows

Dr. Bonds Payable 100,000 Cr. Cash 100,000

Current Liabilities Notes Payable EXAMPLE: First National Bank agrees to lend $100,000 on Sept. 1, 2014, if Cole Williams Co. signs a $100,000, 12%, 4 month note maturing on Jan. 1. Record the issuances of the note payable from Cole Williams Co's perspective. Sept. 1, 2014

Dr. Cash 100,000 Cr. Notes Payable 100,000

Issuing Bonds at a Discount EXAMPLE: Riot Company issued $500,000, 15 year, 7% bonds at 96% (face value) Prepare the journal entry to record the sale of these bonds on January 1, 2014

Jan 1: Dr. Cash (500,000 x .96) 480,000 Dr. Discount on Bonds Payable 20,000 Cr. Bonds Payable 500,000

Issuing Bonds at a Discount EXAMPLE: Cole Corp. issued $400,000. 7%, 20 year bonds on January 1, 2014 for $360,727. This price resulted in an effective-interest rate of 8% on the bonds. Interest is payable annually on January 1. Cole uses the effective interest method to amortize bond premium or discount Prepare the journal entry to record the issuance of the bonds

Jan. 1, 2014: Dr. Cash 360,727 Dr. Discount on Bonds Payable 39,273 Cr. Bonds Payable 400,000

Issuing Bonds at a Premium EXAMPLE: Gomez Company issued $380,000, 7%, 10 year bonds on Jan. 1, 2014, for $407,968. This price resulted in an effective interest rate of 6% on the bonds. Interest is payable annually on January 1. Record the issuance of the bonds

Jan. 1, 2014: Dr. Cash 407,968 Cr. Bonds Payable 380,000 Cr. Premium on Bonds Payable 27,968 (difference)

Issuing Bonds at a Premium EXAMPLE: Gomez Company issued $380,000, 7%, 10 year bonds on Jan. 1, 2014, for $407,968. This price resulted in an effective interest rate of 6% on the bonds. Interest is payable annually on January 1. Record the payment of interest on January 1, 2015

Jan. 1, 2014: Dr. Interest Payable 26,600 Cr. Cash 26,600

Current Liabilities Notes Payable EXAMPLE: First National Bank agrees to lend $100,000 on Sept. 1, 2014, if Cole Williams Co. signs a $100,000, 12%, 4 month note maturing on Jan. 1. Record the issuances of the note payable from Cole Williams Co's perspective. At maturity (Jan. 1), Cole Williams Co. must pay the face value of the note plus interest.

Jan. 1, 2015: Dr. Notes Payable 100,000 Dr. Interest Payable 4,000 Cr. Cash 104,000

Issuing Bonds at a Discount EXAMPLE: Cole Corp. issued $400,000. 7%, 20 year bonds on January 1, 2014 for $360,727. This price resulted in an effective-interest rate of 8% on the bonds. Interest is payable annually on January 1. Cole uses the effective interest method to amortize bond premium or discount Record the payment of interest on January 1, 2015

Jan. 1, 2015: Dr. Interest payable 28,000 Cr. Cash 28,000

issuing Bonds at a Premium EXAMPLE: Assume that on Jan. 1, 2017 Candlestick Inc. sells $100,000, 5 year, 10% bonds at 102, with interest payable annually. The entry to record the sale is:

Jan. 1, 2017 Dr. Cash 102,000 (difference) Cr. Bonds Payable 100,000 Cr. Premium on Bonds Payable (100,000 x .02) 2,000

Issuing Bonds at a Premium EXAMPLE: Canyon Company issued $600,000, 10 year, 6% bonds at 102 Prepare the journal entry to record the sale of these bonds on January 1, 2014

Jan. 1: Dr. Cash (600,000 x 1.03) 618,000 Cr. Bonds Payable 600,000 Cr. Premium on Bonds Payable 18,000

Mortgage Payable EXAMPLE: Nance Co. receives $280,000 when it issues a $280,000, 6%, mortgage note payable to finance the construction of a building at Dec. 31, 2014. Then terms provide for semiannual installment payments of $14,285 on June 30 and Dec. 31. First Installment Payment:

June 30,2015: Dr. Interest Expense (280,000 x 6% x 6/12) 8,400 Dr. Mortgage Payable 5,885 (difference) Cr. Cash 14,285 (given)

Issuing Bonds at a Discount EXAMPLE: Riot Company issued $500,000, 15 year, 7% bonds at 96% (face value) Suppose the remaining Discount on Bonds Payable was $12,000 on December 31, 2019. Show the balance sheet presentation on this date

Long Term Liabilities Bonds Payable Due 2029 500,000 Less: Discount on Bonds Payable 12,000 = $488,000

Current Liabilities Sales Taxes Payable EXAMPLE: The March 25 cash register readings for Cooley Grocery show sales of $10,000 and sales taxes of $600. The journal entry is:

Mar. 25: Dr. Cash 10,600 Cr. Sales Revenue 10,000 Cr. Sales Taxes Payable 600 Assets & Liabilities increase

Unearned Revenue EXAMPLE: Superior University sells 10,000 season football tickets at $50 each for its 5 game home schedule. As each game is completed, Superior records the earning of revenue:

Sept. 7: (500,000 / 5 game = 100,000/game) Dr. Unearned Ticket Revenue 100,000 Cr. Ticket Revenue 100,000

what is a bond certificate?

issued to the investor provides name of the company issuing bonds, face value, maturity date, and contractual (stated) interest rate

discount on bonds payable is what account?

a contra account

what is unearned revenue?

cash received before the goods are delivered

bonds may be issued at:

discount (below face value) face value premium (above face value)

what is "the process of finding the present value" referred to as?

discounting the future amounts

what are contingencies?

events with uncertain outcomes that may represent potential liabilities (lawsuits)

Long term notes/mortgages payable consists of payments with BOTH:

interest on the unpaid balance of the loan AND a reduction of loan principal

each payment on a mortgage note payable consists of:

interest on the unpaid balance of the loan and reduction of loan principal

bonds are a form of what?

interest-bearing notes payable issued by corporations, universities, and governmental agencies

bond prices vary how with changes in the market interest rate?

inversely (as market interest rate decline, bond prices increase)

Sale of bonds above face value causes the total cost of borrowing to be what?

less than the bond interest paid

sale of bonds below face value causes the total cost of borrowing to be what?

more than that bond interest paid

are sales taxes recorded as an expense?

no

what does face value mean?

principal amount due at the maturity date

who is the one borrowing the money?

the bond issuer

who is the one providing the money to the bond borrower?

the bondholder

if bonds are issued at a premium, this indicates that:

the contractual interest rate exceeds the market interest rate

what is the maturity date?

the date the final payment is due

what is the market/effective interest rate?

the rate that investors are currently demanding & receiving on similar investments (not listed on bond certificate)

what is the contractual/stated interest rate?

the rate to determine cash interest paid, stated as an annual rate

what are unsecured bonds?

they are issued against the general credit of the borrower

what are convertible bonds?

they can be converted into common stock at the option of the bondholder

what are callable bonds?

they can be redeemed (brought back) prior to maturity at the option of the bond issuer

what are secured bonds?

they have specific assets pledged as collateral