Acctg 1, Ch. 11, Liabilities: Bonds Payable
The interest on bonds may be payable
- Annually - Semi annually - Quarterly
The journal entry to record the first interest payment on a bond sold at face value is a...
- Debit to Interest Expense (for $$$interest amount) - Credit to Cash (for $$$interest amount) *paid six months' interest on bonds*
Serial bonds
Bonds of the same issue that mature on different dates.
How are bonds payable reported on the balance sheet?
Bonds payable are reported as liabilities on the balance sheet. A full description of the bond is reported either on the face of the balance sheet or the accompanying notes.
Callable bonds
Bonds that may be redeemed by the issuing corporation within the period of time and at the price stated in the bond indenture. Normally call price is above face value.
The time value of money concept recognizes that...
Cash received today is wroth more than the same amount of cash received in the future.
What is the Times Interest Earned Ratio (formula)?
Income Before Income Tax + Interest Expense / Interest Expense
Contract rate (or coupon rate)
The interest rate to be paid on the face amount of a bond.
What does Times Interest Earned Ratio assess?
The times interest earned ratio assesses the risk that bondholders will not receive their interest payments.
Future Value
The value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today. (Ex. invest $1,000 on 10% interest in 1 year for total of $1,100 after 1 year. Future value would be the $1,100--initial value plus interest)
How are unamortized discounts reported on the balance sheet?
Unamortized discounts are reported as a deduction from the face amount of the bonds on the balance sheet.
How are unamortized premiums reported on the balance sheet?
Unamortized premiums are reported as an addition to the face amount of the bonds.
When is a bond redemption considered a gain?
A bond redemption is considered a gain if the price paid for redemption is below the bond carrying amount.
If the market rate is less than the contract rate...
Bonds will sell for MORE than their face value. (Sold at a Premium)
What sort of account is Discount on Bonds Payable and what is it's normal balance (debit or credit)?
Discount on Bonds Payable is a Contra Asset account and has a normal DEBIT balance.
Does Premium on Bonds Payable account have a normal debit or credit balance?
Premium on Bonds Payable has a normal CREDIT balance.
Bond Indenture
The underlying contract between the company issuing bonds and the bondholders.
If the bonds payable account has a balance of $900,000 and the discount on bonds payable account has a balance of $72,000, what is the carrying amount of the bonds?
$828,000 ($900,000 - $72,000)
The journal entry to record bond redemption is...
- Debit Bonds Payable for dollar value of bonds redeemed - Debit Premium on Bonds Payable for amount related to redeemed bonds. (ex. redeemed 1/4th (25%) bonds for a $25,000 value with a premium of $4,000. [4,000 x .25= 1,000, so $1,000 is the amount to debit) - Credit Cash for redemption price (dollar value of bonds received - premium on bonds payable--here it is $24,000) - Credit Gain on Redemption of Bonds for difference between carrying amount (25,000+1,000) and redemption price (24,000), so gain is $2,000
The journal entry to record the payment of the principal amount of a bond at its maturity date is a...
- Debit to Bonds Payable (for principal/face amount of bond) - Credit to Cash (for principal/face amount of bond)
At the maturity date, the entry to record repayment of the face value of a bond is a...
- Debit to Bonds Payable and - Credit to Cash
The journal entry to amortize a bond combined with semiannual interest payment is...
- Debit to Interest Expense - Debit to Premium on Bonds Payable - Credit to Cash for amount of semiannual interest
The combined journal entry to record the first interest payment and the amortization of a bond discount is a...
- Debit to Interest Expense (for Interest Amount + Semiannual amortization [Discount on Bonds Payable / amount of interest payments]) - Credit to Discount on Bonds Payable (for semiannual amortization value) - Credit to Cash (for amount of total interest) *Paid semiannual interest and amortized 1/10th of a bond discount*
The combined journal entry to record the first interest payment and the amortization of a bond premium is a....
- Debit to Interest Expense (for total Interest Amount - Semiannual amortization value [premium / amount of interest payments]) - Debit to Premium on Bonds Payable (for semiannual amortization value [premium / amount of interest payments]) - Credit Cash (for amount of total interest) *Paid semiannual interest and amortized 1/10th of bond premium*
The journal entry for bonds sold at a premium...
- Debits Cash (for $ value that bond sold at) - Credits Bonds Payable (for face amount of bond) - Credits Premium on Bonds Payable (diff between face amount and selling amount) *Issued $$$ bonds at a premium*
The journal entry for issuing bonds payable...
- Debits Cash (for face amount of bond) - Credits Bonds Payable (for face amount of bond) *Issued $$$ bonds payable at face amount*
The journal entry for bonds sold at a discount...
- Debits Cash (for selling amount of bond) - Debits Discount on Bonds Payable (for Face Amount - Selling Price) - Credits Bonds Payable (for face amount of bond) *Issued $$$ bonds at discount*
What are the two methods of computing the amortization of a bond discount?
- Straight line method - Effective interest rate method (aka the interest method)
Two most common types of bonds?
- Term bonds - Serial Bonds
When a corporation issues bonds, the proceeds received for the bonds depend on what?
- the face amount of the bonds - the interest rate on the bonds - the market rate of interest for similar bonds
Where should a description of the bond be reported?
A bond description should be reported either on the face of the financial statements or in the accompanying notes.
When is a bond redemption considered a loss?
A bond redemption is considered a loss when the price paid for the redemption is above the carrying amount.
When market rate of interest declines below the contract rate of interest what might a company do to a bond?
A corporation may redeem or call bonds before they mature if the market rate of interest falls below the contract rate of interest. Corp. may issue new bonds at lower interest rates and use proceeds to redeem the original bond issue.
The Balance in Unamortized Discount on Bonds Payable should be reported on the balance sheet as...
A deduction from the face amount of the related bonds payable.
Bond
A form of interest bearing note.
Because the sale of a bond is an issue of debt it is reported as what on the financial statements?
A liability
Effective Interest Rate Method
A method of amortizing a bond discount or premium that provides for a constant rate of interest over the life of the bonds. (required by GAAP)
Straight-line Method of Amortization
A method of amortizing a bond discount or premium that provides for equal amounts of discount (or premium) to be written off to interest expense each period.
What does a times interest earned ratio of 1.0 suggest?
A times interest earned ratio of 1.0 suggests that the firm is unable to cover interest payments from income before tax. This could eventually lead to loan defaults.
Any unamortized premium on bonds is reported as...
An addition to the face amount of the bonds.
Bonds that are due within one year are reported as what?
Bonds due within one year are reported as current liabilities.
Term bonds
Bonds of an issue that mature at the same time
If the market rate equals the contract rate...
Bonds will sell AT the face amount
If the market rate is greater than the contract rate...
Bonds will sell for LESS than their face value. (Sold at a discount)
The balance in the discount on bonds payable account would usually be reported on the balance sheet in the...
Long-term liabilities section
The amortization of a discount will appear as...
Part of interest expense on the income statement.
The face amount of each bond is called the
Principal
Amortization of a Bond Discount
The periodic transfer of a bond discount to interest expense. Every period, a portion of the bond discount must be reduced and added to interest expense to reflect passage of time.
Market rate of interest (effective rate of interest)
The rate determined from sales and purchases of similar bonds.
Present Value
The value of an asset or cash at present that is equivalent in value to a specified sum in the future. (Ex. invest $1,000 on 10% interest in 1 year for total of $1,100 after 1 year. present value would be the $1,000--initial value minus interest)
The effect or purpose of the discount amortization is?
To increase the interest expense.
