Financial Accounting - Chapter 11: Liabilities: Bonds Payable

straight-line method of amortization

Provides equal amounts of discount (or premium) to be written off to interest expense each period.

installment note

A debt that requires the borrower to make equal periodic payments to the lender for the term of the note.

bond

A form of an interest-bearing note used by corporations to borrow on a long-term basis.

times interest earned

A ration that computes the number of items interest payments could be paid out of current-period earnings.

annuity

A series of equal cash flows at fixed intervals.

face amount

An amount at which bonds sell if the market rate equals the contact rate.

carrying amount

The balance of the bonds payable account (face amount of the bonds) less any unamortized discount or plus any unamortized premium.

bond indenture

The contract between a corporation issuing bonds and the bondholders.

future value

The estimated worth in the future of an amount of cash on hand today invested at a fixed rate of interest.

present value

The estimated worth today of an amount of cash to be received (or paid) in the future.

premium

The excess of the issue price of a stock over its par value or the excess of the issue price of bonds over their face amount.

discount

The interest deducted from the maturity value of a note or the excess of the face amount of bonds over their issue price.

effective rate of interest

The market rate of interest at the time bonds are issued.

effective interest rate method

The method of amortizing discounts and premiums that provides for a constant rate of interest on the carrying amount of the bonds at the beginning of each period; often called simply the "interest method."

contract rate

The periodic interest to be paid on the bonds that is identified in the bond indenture; expressed as a percentage of the face amount of the bond.

amortization

The periodic transfer of the cost of an intangible asset to expense.

market rate of interest

The rate determined from sales and purchases of similar bonds.

present value of an annuity

The sum of the present values of a series of equal cash flows to be received at fixed intervals.