Lesson 2 - Accounting for Bonds Payable

To make journal entry balance (debits=credits)

"plug"

The higher rate is based on the relatively ______________________________ of the corporation or some change in the economy since the bonds payable were originally issued.

low-credit worthiness

Journal entries for recording amortization of a discount have the ____________________________ on Interest Expense as the journal entries for recording amortization of a premium.

opposite effect

The primary objective for amortizing the Discount on Bonds Payable is to _________ the balance in that account to zero by the maturity date on which payment of the principal balance is due.

reduce

The primary objective for amortizing the Premium on Bonds Payable is to __________ the balance in that account to zero by the maturity date on which payment of the principal balance is due.

reduce

The issuers of bonds payable must make interest payments to the investors every _____________________.

six months

The issuers of bonds payable must make interest payments to the investors every ________________________.

six months

The privilege to retire bonds payable early may include a fee of ______________________.

1% or 2%

Interest-bearing debt agreements

Bonds payable

Issued with maturity dates that extend out many years.

Bonds payable

The accounting profession requires any difference between face value of bonds payable and _____________ received to be decreased over the entire life of the bonds payable.

Cash

_________ when issuing bonds payable will normally NOT equal the face value of the bonds payable.

Cash

Representing bonds payable can be purchased or sold on market exchanges by individuals, banks, or other companies.

Certificates

Represents ownership of the corporation

Common stock

Often exercise this privilege to replace older bonds payable with high interest rates with newer bonds payable with lower interest rates.

Corporations

When bonds are retired and you need a credit to balance the journal entry it is called ________________________.

Gain on retirement of bonds payable

When bonds payable are retired and you need a debit to balance the journal entry, it is called ______________________________.

Loss on retirement of bonds payable

Dates by which the principle amount is expect to be repaid

Maturity dates

This process is similar to the calculation of amortization expense for intangible assets.

Straight-line method

T or F: It is rare for the retirement bonds issued at a discount to result in a Gain on retirement of bonds payable.

True

T or F: There is no effect on the amount paid for interest for bonds issued at a premium or issued at a discount.

True

Is it possible for the amount paid in Cash to exceed the amounts for Bonds payable and Premium on Bonds Payable?

Yes

The process of reducing the balance in the Premium on Bonds Payable is called _______________________________.

amortization

If the bonds payable mature in 10 years, then the amount should be ___________________________ every payment date.

amortized

# certificates x $$1,000 face value

bonds payable

Instead of issuing shares of common stock to finance the acquisition of land or the construction of buildings, many corporations choose instead to issue ______________________________.

bonds payable

May be issued for amounts that are equal to, greater than, OR less than their face value

bonds payable

The process of making interest payments and amortizing the premium or discount on bonds payable will continue until maturity of _____________________.

bonds payable

# shares x par value

common stock

ONLY can be issued for amounts equal to or greater than par value

common stock

Often the corporation that issues bonds payable decides to retire them early (pay the principal amount before maturity). This privilege is often granted to the ____________________ as part of the original issuance of the bonds payable.

corporation

Bonds payable usually have a __________________ (similar to par value for common stock) of $1,000 per certificate.

face value

The amount paid is calculated by multiplying the ___________________ of the bonds payable by the state interest rate and then, divide by two (since payments are made twice a year)

face value

The lower interest rate is based on the ____________________________________________ of the corporation or some change in the economy since the bonds payable were originally issued.

high-credit worthiness

MORE risk =

higher rates

The differences usually result from differences in the ____________________________ to be PAID to bondholders versus the interest rates bondholders EXPECT based current market conditions or credit-worthiness of the corporation issuing the bonds payable.

interest rates