Chapter-17-Bonds-Payable.ppt

Click to edit Master title style,Click to edit Master text styles,Second Level,Third Level,17-,*,Bonds Payable,CHAPTER 17,Learning objectives,1.Know the features of bonds.,2.Understand the key vocabularies:interest rate,market interest rate,face value,discount,and premium.,3.Be able to make entries for bonds issued at face value,bonds issued at a discount,and bonds issued at premium.,Bonds,1,000,Bond Certificate,Investor,Firm,Bonds,A bond is a security,usually long-term,representing,money borrowed by a corporation from the investing,public.,Bond,Certificate,The face value of the bond is$1,000 or some multiple of$1,000.,Bonds,The total number of bonds that are issued at one time,is called a,bond issue,.,$10,000 bond issue,$1,000,bond,$1,000,bond,$1,000,bond,$1,000,bond,$1,000,bond,$1,000,bond,$1,000,bond,$1,000,bond,$1,000,bond,$1,000,bond,The specific terms of a bond issue are specified in a,bond indenture,.,Bond Indenture,Bond indenture,Maturity date,Interest payment dates,Interest rate,Repayment plans,restrictions,Rights,Privileges,Limitations,It generally determines whether there is a company call the debt,and what is the preference in liquidation in the event of corporate failure.,Interest Rate and Market Interest Rate,Face interest rate,market interest rate,It is the rate of interest paid to the bondholders based on the face value or principal of the bonds,The market interest rate is the rate of interest paid in the market by bond investors for bonds of similar risk.,as close as possible to,Interest Rate and Market Interest Rate,Face interest rate,market interest rate,Market interest rate Face interest rate,The issue priceFace value,The bonds are to be issued at a,discount,.,Market interest rate Face interest rate,The issue priceFace value,The bonds are to be issued at a,premium,.,Interest Rate and Market Interest Rate,To illustrate,lets look at an example,Interest Rate and Market Interest Rate,Lets assume that Anderson Company issues 5-year,8%,bonds.Bonds have a,$1,000,face value,and pay interest every six months.,Interest Rate and Market Interest Rate,If the market interest rate is,8%,when Anderson,Issues its 8%bonds,1,000,$40,every six months,INVESTORS,At maturity date,they will also get their$1,000 investment back.,Interest Rate and Market Interest Rate,If the market interest rate is,10%,when Anderson,Issues its 8%bonds,INVESTORS,At maturity date,they will also get their$1,000 investment back.,$40,every six months,Purchase at a discount,The discount equals the excess of face value over issue price.,Interest Rate and Market Interest Rate,If the market interest rate is,6%,when Anderson,Issues its 8%bonds,INVESTORS,$40,every six months,At maturity date,they will also get their$1,000 investment back.,Pay a premium,The premium is equal to the excess of the issue rice over the face value.,Bonds Issued at Face Value,Bonds,Issued,at,Face Value,Bonds Issued at Face Value,Suppose that Anderson Company has issued 100 of,its 5-year,8 percent,bonds,at face value,on April 1,20X0.Interest is paid on October 1 and April 1 of,each year.,Bonds Issued at Face Value,The entry,April 1,20X0 Cash$100,000,Bonds Payable$100,000,October 1 of each year,Interest Expense 4,000,Cash 4,000,Interest was paid in full through October 1.,Bonds Issued at Face Value,Dec.31 from 20X0 to 20X4,Interest Expense 2,000,Interest Payable 2,000,The year-end entry must be prepared to reflect the accrual of interest for October through December.,Bonds Issued at Face Value,April 1,20X5 Bonds Payable 100,000,Cash 100,000,April 1 from 20X1 to 20X5,Interest Expense 2,000,Interest Payable 2,000,Cash 4,000,When the next interest payment date arrives on April 1,the actual interest payment will cover the previously accrued interest,and additional amounts pertaining to January,February,March and April.,Bonds Issued at a Discount,Bonds,Issued,at,a Discount,Bonds Issued at a Discount,Suppose Anderson issues 100 of 5-year,8%,bonds at,$92,278,on January 1,20X0 when the market interest rate is,10%,.The interest will be paid on July 1 and January 1 of each year.,Anderson will have to repay a total of$140,000,which,consists of the$4,000 every 6 months for five years,and$100,000 at maturity.,Bonds Issued at a Discount,Anderson,$92,278$47,722,Investor,This$47,722 must be spread over 10 six-month periods.,$140,000,Bonds Issued at a Discount,Thus,the$4,000 periodic interest payment is increased,by$772.20 of discount amortization each period.,Discount,$10,000$92,278,?,Discount,$7,722,The total cost is increased by the,$7,722,discount.,Bonds Issued at a Discount,The entry,Jan.1,20X0 Cash$92,278,Discount on Bonds Payable 7,722,Bonds Payable$100,000,Bonds Issued at a Discount,July 1 and January 1 each year,Interest Expense 4,772,Discount on Bonds Payable 772,Cash 4,000,Dec31,20X5 Bonds Payable 100,000,Cash 10,000,Bonds Issued at Premium,Bonds,Issued,at,Premium,Bonds Issued at Premium,Suppose that Anderson issues 100 of the 5-year,8%,bonds at,$108,530,on February 1,20X1 when the,market interest rate is,6%,.The interest will be paid,on July 1 and January 1 of each year.,Anderson will have to repay a total of$140,000,which,consists of the$4,000 every 6 months for five years,and$100,000 at maturity.,Bonds Issued at Premium,Anderson,$108,530,$31,470,Investor,$140,000,This$31,470 must be expensed over 10 six-month periods.,Bonds Issued at Premium,Premium,?,Premium,$108,530,$100,000,$8,530,Total borrowing cost is reduced by the,$8,530,premium.,Thus,the$4,000 periodic interest payment is reduced by,$853 of premium amortization each period.,Bonds Issued at Premium,The entry,Jan.1,20X1 Cash$108,530,Premium on Bonds Payable$8,530,Bonds Payable 100,000,Bonds Issued at Premium,July 1 and January each year,Interest Expense 3,147,Premium on Bonds Payable 853,Cash 4,000,Dec.31,20X6 Bonds Payable 100,000,Cash 100,000,WE ARE SAILING RIGHT ALONG!,