Chapter 15

15-1
CHAPTER 15
LONG-TERM FINANCING
BONDS
[After listening to the lecture
comments for this slide,
click anywhere outside the
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Three Ways Corporations

Can Raise Cash
Sell Stock
Borrow from Bank
Borrow from Investors

(i.e., Sell Corporate Bonds)
15-2
Forget U. S. Government Savings Bonds.

They are very different from corporate
bonds.
15-3
Nature of Bond Transactions

Never lose sight of the nature
of a bond transaction!
Is long-term debt for issuing company
Is investment for purchasing companies or individuals
Cash
Seller
A/K/A:
Issuer
Borrower
Buyer
Bond Certificate
A/K/A:
Investor
Lender
15-4
Nature of Bond Transactions

The seller agrees to pay and the buyer
expects to get
Periodic interest at specified dates
Face value (i.e., principal) of bonds at maturity
Interest Payments
Every Six Months
Seller
A/K/A:
Issuer
Borrower
Buyer
Face Value Payment
at Maturity
A/K/A:
Investor
Lender
15-5
Other Types of Loans

What is the most familiar loan to you?
Parents
Auto
Home
Auto or Home Loan vs.

Bond Loan
15-6
How
How does
doesthe
therepayment
repayment of
of an
anauto
autoor
orhome
homeloan
loan
differ
differfrom
fromthe
therepayment
repayment of
of aabond
bond loan?
loan?
Auto/Home Loan
Bond Loan
Principal Payment
(at maturity)
Level Periodic Payments
Level Periodic Payments
(Includes principal & interest)
(Includes interest only)
Time
Last Pmt.
Time
Last Pmt.
15-7
Bonds vs. Stock

BONDS
STOCK
15-8
Bonds vs. Stock

BONDS
Debt
STOCK
Equity
15-9
Bonds vs. Stock

BONDS
STOCK
Debt
Equity
Maturity Date
No Maturity
15-10
Bonds vs. Stock

BONDS
STOCK
Debt
Equity
Maturity Date
No Maturity
Interest
Dividends
15-11
Bonds vs. Stock

BONDS
STOCK
Debt
Equity
Maturity Date
No Maturity
Interest
Dividends
Bond Interest
Expense Is
Deductible for
Taxes
Dividends Are Not

Deductible for
Taxes
15-12
Bonds vs. Stock
Know advantages of issuing debt (p. 545)

Does not dilute control of company
Interest is tax deductible
Favorable financial leverage
A/K/A Trading on the equity
Know disadvantages of issuing debt (546)

Interest must be paid
Harder to withstand a major loss
Possibility of unfavorable financial
leverage
Favorable Financial Leverage
15-13
(Using borrowed funds to increase EPS)

(E.g. borrow at 10%; invest at 20%)
P. 547
Characteristics of Bonds
(PP. 544 - 545)
Secured or Unsecured Bonds
Registered or Unregistered Bonds
Coupon Bonds
Serial Bonds
Callable Bonds
Convertible Bonds
Bonds with Stock Warrants
Junk Bonds
15-14
15-15
Bonds Payable Terms

BOND PAYABLE
15-16
Bonds Payable Terms

Face Value $1,000
BOND PAYABLE
1. Face Value = Maturity Value
15-17
Bonds Payable Terms

Face Value $1,000
BOND PAYABLE

2. Stated Interest Rate
Interest 10%
15-18
Bonds Payable Terms

Face Value $1,000
BOND PAYABLE

2. Stated Interest Rate
3. Interest Payment Dates
Interest 10%
6/30 & 12/31
15-19
Bonds Payable Terms

Face Value $1,000
BOND PAYABLE
Bond Date 12/31/94
1.
2.
3.
4.
Face Value = Maturity Value

Stated Interest Rate
Interest Payment Dates
Bond Date
Interest 10%
6/30 & 12/31
15-20
Bonds Payable Terms

Face Value $1,000
Interest 10%
6/30 & 12/31
BOND PAYABLE
Bond Date 12/31/94
1.
2.
3.
4.
5.

Interest Payment Dates
Bond Date
Maturity Date
Maturity Date 12/31/99
15-21
Bonds Payable Terms

Face Value $1,000
Interest 10%
6/30 & 12/31
BOND PAYABLE
Bond Date 12/31/94
1.
2.
3.
4.
5.
Maturity Date 12/31/99

Interest Payment Dates We also need to know
the sale or issue date
Bond Date
of the bond.
Maturity Date
Bonds Issued at Face Value

on Bond Date - Example
15-22
On 12/31/94 Graphics Inc. issues 10 bonds

at face value. The market interest rate is
10%. The bonds have the following terms:
Face Value = $1,000
Maturity Date = 12/31/99 (5 years)
Stated Interest Rate = 10%
Interest Dates = 6/30 & 12/31
Bond Date = 12/31/94

on Bond Date
Prepare the journal entry to record the
issuance of the bonds on 12/31/94.
15-23

on Bond Date
issuance of the bonds on 12/31/94.
Long-term
Liability
15-24

on Bond Date
Prepare the journal entry required every
6/30 and 12/31 to pay interest.
15-25

on Bond Date
Prepare the journal entry required every
6/30 and 12/31 to pay interest.
15-26

on Bond Date
maturity of the bond on 12/31/99.
15-27

on Bond Date
maturity of the bond on 12/31/99.
15-28
Bonds Issued Between

Interest Dates
In the previous example, the
bonds were sold on the
bond date.
But this is not always the
case.
Are you ready to see what
happens when we sell
bonds between the bonds
interest dates?
15-29

Interest Dates
15-30
When bonds are sold between the

interest dates, the bond issuer collects
cash for:
The face value of the bonds
AND
The accrued interest since the bonds date

Interest Dates
Then, on the next interest payment date,
the bond issuer pays bondholders a
full 6 months of interest.
15-31

Interest Dates
The 6 month interest payment to the
bondholders is composed of:
Repayment of the interest received from

the bondholders when the bonds were
originally sold
AND
Interest earned by the bondholders since

the bonds were sold
Why is it done this way?
15-32

Interest Dates - Example
On 4/1/95 Graphics Inc. issues 1,000
bonds at face value. The bonds have
the following terms:
Face Value = $1,000
15-33

Interest Dates
15-34
How much cash is Graphics Inc. going to

receive for the entire issue of the bonds?
Cash Price of Bonds:
$1,000 1,000 =
Accrued Interest:
$1,000,000 10% 3/12 =
Total Cash Received
1,000,000
25,000
$
1,025,000

Interest Dates
15-35
What does the $25,000 in accrued interest

represent for Graphics Inc.?
t
s
e
r
Inte ble
a
y
a
P

Interest Dates
15-36
Prepare the journal entry to record the bond

issue on 4/1/95.

Interest Dates
15-37

issue on 4/1/95.

Interest Dates
15-38

interest payment on 6/30/95.

Interest Dates
15-39

Bond Interest Expense is for the three
months April, May, and June.
($1,000,000 10% 3/12 = $25,000)

Interest Dates
15-40

Total Bond Interest Paid is for the six
months January through June
($1,000,000 10% 6/12 = $50,000)

Interest Dates
15-41

The debit to Bond Interest Payable is
for the accrued interest that was
collected when the bonds were sold.
15-42
Interesting Terminology
The two sets of interest terms
used with bonds are:
Market Rate - A/K/A:
Effective Rate
Yield Rate
APR
"True" Rate
Compound Rate
Contract Rate - A/K/A:

Stated Rate
Coupon Rate
Nominal Rate
Face Rate
Simple Rate
15-43
Bond Prices and Interest Rates
Market rate = contract rate

Bonds sell at face or par value
Market rate > contract rate

Bonds sell at a discount
(i.e., below face value)
Market rate < contract rate

Bonds sell at a premium
(i.e., above face value)
Market Interest Rate vs.

Contract Interest Rate
YES! NO!
What happens when the
market interest rate is
different from the bonds
contract interest rate?
For example, the market is
earning 12%. Would you want
to invest in Graphics Inc.s
10% bond?
15-44

15-45
How could Graphics Inc. make their bonds

more attractive to you?
They cannot change any terms of the bonds
payable.
The only thing they can change is the
selling price of the bonds.

15-46
So, if the bond is paying 10% interest and

the market is paying 12% interest,
Graphics Inc. would:
Sell the bond below face value
(i.e., at a discount)
BUT
Pay interest on the full face value
AND
Repay the full face value at maturity

This arrangement will increase the
effective interest rate of Graphics Inc.
bonds to the market rate.
Therefore, Graphics Inc.s 10% bonds
would be just as attractive as the market
investments earning 12%.
How can this happen?
(Proof is on next slide)
15-47

Proof of Concept
Assumptions:
Face amount (i.e., loan) = $1,000
Length of loan
= 1 yr.
Market rate
= 12%
Contract rate
= 10%
Illustration 15.3, P. 550
(Slightly modified)
12%
10%
15-48

Proof of Concept
Assumptions:
Face amount (i.e., loan) = $1,000
Length of loan
= 1 yr.
Market rate
= 12%*
Contract rate
= 10%
Interest = Principal x Rate x Time

100** =
P
x .12* x 1
833
**1,000 x 10% contract rate
15-49
Bonds Sold at a Discount

on Bond Date
On 12/31/94 Graphics Inc. sells 1,000 bonds
at 92.6395% of face value. The market
interest rate is 12%. The bonds have the
following terms:
Face Value = $1,000
15-50
15-51

receive for the entire bond issue?
15-52

$1,000 face value 1,000 bonds sold =
$1,000,000 face amount
$1,000,000 92.6395% = $926,395 cash proceeds
How much does Graphics Inc. agree to repay at
maturity?
15-53

Graphics Inc. agrees to repay the full
face value at maturity.
$1,000 face value 1,000 bonds sold =
$1,000,000
15-54

The difference between the face value of the
bonds and the cash received is the discount.
$1,000,000 - $926,395 = $73,605
The discount causes additional interest
expense factor for Graphics Inc but does not
affect interest paid. The discount will be
amortized to Bond Interest Expense over the
outstanding life of the bonds.
15-55

issue of the bonds on 12/31/94.
15-56

Contra-Liability
Account
15-57

Discount on
Bonds Payable
12-31 bal.
73,605
15-58

Partial Balance Sheet at 12/31/94
Long-term Liabilities:
Bonds Payable
Less: Discount on Bonds Payable
$ 1,000,000
73,605
$ 926,395
Face (Maturity)
Value
Carrying Value
15-59

Definition of Carrying Value?
Face/Maturity Value
- unamortized discount (current example)
or
+ unamortized premium (later example)
15-60

Prepare the journal entries required
every 6/30 and 12/31. Use straight-line
amortization of the discount.
Effective interest
method will be
discussed later
in the lecture.
15-61

GENERAL JOURNAL
Date
6/30
Description
PR
Bond Interest Expense

Discount on Bonds Payable
Cash
To record bond interest payment
$1,000,000 10% = $50,000
To record discount amortization
$73,605 5 yrs. = $14,721 per year
$14,721 2 = $7,360 rounded
Page 1
Debit
Credit
57,360
7,360
50,000
15-62

Discount on
Bonds Payable
12-31 bal. 73,605
7,360 Amortization on 6-30
6-30 bal.
66,245
15-63

Bonds Payable
$ 1,000,000
66,245
$ 933,755
As the discount is amortized, the carrying

value of the bonds payable increases toward
the maturity value. (i.e. we subtract a smaller
and smaller contra account on the B/S.)
15-64

Bonds Payable
$ 1,000,000
66,245
Down from
$73,605
$ 933,755
Up from
$926,395
15-65
Compound Interest Concepts

Before we go any
further, lets make
sure we understand
the compound interest
concepts in the
appendix!

Example #1
Future
Future Value
Value (Worth)
(Worth) of
of $1
$1
Example is related to Illustration 15-6
Interest Rate = 12%
No. Periods = 2 years
- $1.2544
(From Table
- ? A.1)
+ $1
Year 1
Year 2
Today
+ $1,000
-X
1
1.2544
15-66

Example #2
Future
Future Value
Value of
of an
an Annuity
Annuity of
of $1
$1
Interest Rate = 6%
No. Periods = 3
+ $1
+ $1
Pd. 1
+ $1
Pd. 2
- $3.1836
(From Table
- ? A.2)
Pd. 3
Today
+ $100
+ $100
1
+ $100
=
3.1836
-X
15-67

Example #3
Present
Present Value
Value (Worth)
(Worth) of
of $1
$1
Two Perspectives:
Text
Rice
Text
Year 1
Year 2
Today
Rice
Year 1
Today
Year 2
15-68

Example #3
Present
Present Value
Value (Worth)
(Worth) of
of $1
$1
Interest Rate = 12%
No. Periods = 2 years
+ $.7972
(From+Table
?
A.3)
- $1
Rice
Year 1
Year 2
Today
+X
- $1,000
.7972
1 .
15-69

Example #4
Present
Present Value
Value of
of an
an Annuity
Annuity of
of $1
$1
+ $2.673
(From +
Table
? A.4)
Interest Rate = 6%
No. Periods = 3
- $1
Pd. 1
- $1
Pd. 2
- $1
Pd. 3
Today
+X
- $100
2.673
- $100
=
1 .
- $100
15-70
So, What Does All of This

Have to do With Bonds?
The bond investor is buying the
right to receive two things:
X - The present value of the maturity
amount of the bonds (i.e., the face amount)
Y - The present value of the periodic
bond interest payments
15-71
So, What Does All of This

Have to do With Bonds?
15-72
Example below uses data from bottom p. 550

Facts: Interest Rate = 6%
No. Periods = 6
Maturity/Face Amount = $100,000
1999
6-30
12-31
Pd. 1
Issue
Date
2000
6-30
Pd. 2
2001
6-30
12-31
Pd. 3
Pd. 4
12-31
Pd. 5
Pd. 6
QUESTION: This bond was sold at a (click one):

Premium
Discount
Face Amount
X
+ 70,496
+Y
29,504 - 6,000
2002
6-30
Maturity
Date
- 100,000
- 6,000
- 6,000
- 6,000
- 6,000
- 6,000
100,000
Z
= Total Present Value of Bonds (i.e., Total Market Price)
A/K/A, the cost to the investor and the proceeds to the issuer.
15-73
Lets apply what

we just learned.
15-74

NOTE:
NOTE: The
The$926,395
$926,395 selling
selling price
price of
of the
the
bonds
bondson
onthe
thenext
nextslide
slide was
waspreviously
previously
Calculate
how
calculated
on
slide
#52
as
a
simple
calculated on slide #52 as a simple
percentage
Graphics,
Inc.
percentageof
of face
faceamount.
amount.The
Thecurrent
current
calculation
one
calculation is
is aaconceptual
conceptual
onewhich
which
would determine
builds
buildson
onthe
thepresent
present value
valueconcepts
concepts in
in
the
selling
price
of
the
appendix
and
on
the
last
few
slides.
the appendix and on the last few slides.
AAcalculation
price
its
bonds.
calculationof
ofbond
bondselling
selling
price will
will
be
beon
onthe
the next
next test.
test.
15-75

Facts
Face Value
Number of Periods (5 yrs. 2)
Market Interest Rate
$ 1,000,000
10%
10
12%
Present Value of Bonds on Issuance Date:

Principal
$ 1,000,000
PV $1, 10 periods, 6%
.55839
PV of Principal
Interest Payments
$
50,000
PV Ann. $1, 10 periods, 6%
7.36009
PV of Interest Payments (rounded)
Selling Price of Bonds
558,390
368,005
926,395
15-76

Contract Interest Rate (again)
YES! NO!
Now, what happens
when the market interest
rates are lower than the
bonds contract interest rate?
For example, the market is
earning 8%. Would you want
to invest in Graphics Inc.s
10% bond?

15-77
So, if the bond is paying 10% interest and the

market is paying 8% interest, Graphics Inc.
would:
Sell the bond above face value
(i.e.,
at a premium)
BUT
Pay interest on only the face value
AND
Repay only the face value at maturity

15-78
Based on the logic explained

earlier, this arrangement will decrease the effective
interest rate of Graphics Inc. bonds to the market rate.
Therefore, Graphics Inc.s 10% bonds would provide

a return to the investor/lender equal to the
markets 8%.
15-79
Bonds Sold at a Premium

On 12/31/94 Graphics Inc. sells 1,000 bonds
at 108.1105% of face value. The market
interest rate is 8%. The bonds have the
following terms:
Face Value = $1,000
15-80

15-81

$1,000 face value 1,000 sold =
$1,000,000 face amount
$1,000,000 108.1105% = $1,081,105
cash proceeds
15-82

How much does Graphics Inc. agree to
repay at maturity?
$1,000 face value 1,000 sold = $1,000,000
How much cash interest does Graphics Inc.
agree to pay at each interest date?
$1,000,000 10% contract rate 6/12 =
$50,000
This is the cash amount which will be paid
regardless of whether the bonds were issued
at face, a discount or a premium!
15-83

In this case, the difference between the
face value of the bonds and the cash
received is the premium.
$1,081,105 - $1,000,000 = $81,105
The premium causes a reduction in the
interest expense for Graphics but not in
the interest paid. The premium will be
amortized to bond interest expense over
the life of the bonds.
15-84

15-85

Adjunct-Liability
Account
15-86

Premium on
Bonds Payable
81,105 Bal. 12-31
15-87

Bonds Payable
Add: Premium on Bonds Payable
$ 1,000,000
81,105
1,081,105
Maturity Value
Carrying Value
15-88

Prepare the journal entries required
every 6/30 and 12/31. Use straight-line
amortization of the premium.
Again, effective
interest method
will be discussed
later in lecture.
15-89

GENERAL JOURNAL
Date
6/30
Description
PR

Premium on Bonds Payable
Cash
To record bond interest payment
$1,000,000 10% = $50,000
To record premium amortization
$81,105 5 yrs. = $16,221 per year
$16,221 2 = $8,111 rounded
Page 1
Debit
Credit
41,889
8,111
50,000
15-90

Premium on
Bonds Payable
81,105 Bal. 12-31
6-30 amort. 8,111
72,994 Bal. 6-30
15-91

Bonds Payable
$ 1,000,000
72,994
Adjunct-liability
Down from
account
$81,105
1,072,994
Down
Carrying
from
$1,081,105
Value
15-92

Bonds Payable
$ 1,000,000
72,994
1,072,994
As the premium is amortized, the carrying

value of the bonds payable decreases toward
the maturity value. (i.e. we add a smaller and
smaller adjunct account on the B/S.)
15-93

Again,
The
price
of
The$1,081,105
$1,081,105selling
selling
pricelets
of the
the
bonds
slide
was
calculate
bondson
on the
thefollowing
following
slidehow
was
previously
on
slide
#81
as
aa
previouslycalculated
calculated
on
slide
#81
as
Graphics,
Inc.
simple
simplepercentage
percentageof
offace
faceamount.
amount.As
As
would
determine
before,
calculation
is
before,the
thefollowing
following
calculation
isaa
conceptual
builds
present
the
selling
price
of
conceptual one
onewhich
which
buildson
on
present
value
the
valueconcepts
conceptsin
inthe
theappendix.
appendix.
bonds.
15-94

Facts
Face Value
Number of Periods (5 yrs. 2)
Market Interest Rate
$ 1,000,000
10%
10
8%
Present Value of Bonds on Issuance Date:

Principal
$ 1,000,000
PV $1, 10 periods, 4%
. 67556
PV of Principal
Interest Payments
$
50,000
PV Ann. $1, 10 periods, 4%
8.11090
PV of Interest Payments (rounded)
Selling Price of Bonds
405,545
$ 1,081,105
675,560
15-95
Examples of Simple Sales Entries

Sold at Face
Cash
Bonds Payable
1,000
1,000
Sold at Discount
Cash
Bonds Payable
900
100
1,000
Sold at Premium
Cash
1,100
100
Bonds Payable
1,000
Methods of Amortization
Straight-Line vs. Effective Interest
Which is preferred for GAAP?

Effective interest method
So, when can straight-line be used?

When the results are not materially
different from the effective interest method.
How do the two methods differ?
15-96
Conceptual difference given a
situation.
Straight-line
discount
Effective Interest
?
$
?
Time
Time
15-97
Conceptual difference given a
situation.
Straight-line
discount
Effective Interest
CV
Time
Interest expense:
constant amount
Int .
Exp.
Time
Interest expense:
constant rate
15-98
Effective Interest Method
15-99
(For Either Premium or Discount)
Calculate bond interest expense at the

date of each semiannual interest
payment as follows
Bond interest expense = Carrying value of
bond at beginning of period X
Market/effective/yield rate of interest X 6/12
The amortization amount, then, is simply

the difference between the interest
expense and the cash interest payment.
15-100
Discount Example
From an earlier example, Graphics Inc. sold 10%
bonds with a face value of $1,000,000 for
$926,395. Market rate = 12%.
Amortization entry 6 months later
*55,584
Cash ($1,000,000 x .10 x 6/12)
50,000
5,584
*($926,395 x .12 X 6/12)
To do the next amortization entry, one

ideally needs what?

Discount Amortization Table
(A)
(B)
(C)
(D)
(E)
Interest Interest
Discount
Unamortized Carrying
Date
Payment Expense Amortization Discount
Value
1/1/95
$
73,605 $ 926,395
6/30/95 $ 50,000 $ 55,584 $
5,584
68,021
931,979
12/31/95 50,000
55,919
5,919
62,102
937,898
A: $1,000,000 10% = $50,000
B: $931,979 6% = $55,919
C: $55,919 - $50,000 = $5,919
D: $68,021 - $5,919 = $62,102
E: $1,000,000 - $62,102 = $937,898
15-101

Discount Amortization Table
Date
1/1/95
6/30/95
12/31/95
6/30/96
12/31/96
6/30/97
12/31/97
6/30/98
12/31/98
6/30/99
12/31/99
(A)
(B)
(C)
(D)
(E)
Interest Interest
Discount
Payment Expense Amortization Discount
Value
$
73,605 $ 926,395
$ 50,000 $ 55,584 $
5,584
68,021
931,979
50,000
55,919
5,919
62,102
937,898
50,000
56,274
6,274
55,828
944,172
50,000
56,650
6,650
49,178
950,822
50,000
57,049
7,049
42,129
957,871
50,000
57,472
7,472
34,657
965,343
50,000
57,921
7,921
26,736
973,264
50,000
58,396
8,396
18,340
981,660
50,000
58,900
8,900
9,440
990,560
50,000
59,434
9,440 *
0 1,000,000
* Adjusted.
15-102
15-103
Premium Example
From an earlier example, Graphics Inc. sold
10% bonds with a face value of $1,000,000 for
$1,081,105. Market rate = 8%.
Amortization entry 6 months later
*43,244
6,756
Cash ($1,000,000 x .10 x 6/12)
50,000
*($1,081,105 x .08 X 6/12)
And now, the amortization table...

Premium Amortization Table
(A)
(B)
(C)
(D)
(E)
Interest Interest
Premium
Date
Payment Expense Amortization Premium
Value
1/1/95
$ 81,105 $ 1,081,105
6/30/95 $ 50,000 $ 43,244 $
6,756
74,349
1,074,349
12/31/95 50,000
42,974
7,026
67,323
1,067,323
A: $1,000,000 10% = $50,000
B: $1,074,349 4% = $42,974
C: $50,000 - $42,974 = $7,026
D: $74,349 - $7,026 = $67,323
E: $1,000,000 + $67,323 = $1,067,323
15-104

Premium Amortization Table
Date
1/1/95
6/30/95
12/31/95
6/30/96
12/31/96
6/30/97
12/31/97
6/30/98
12/31/98
6/30/99
12/31/99
(A)
(B)
(C)
(D)
(E)
Interest Interest
Premium
Payment Expense Amortization Premium
Value
$ 81,105 $ 1,081,105
$ 50,000 $ 43,244 $
6,756
74,349
1,074,349
50,000
42,974
7,026
67,323
1,067,323
50,000
42,693
7,307
60,016
1,060,016
50,000
42,401
7,599
52,417
1,052,417
50,000
42,097
7,903
44,514
1,044,514
50,000
41,781
8,219
36,295
1,036,295
50,000
41,452
8,548
27,747
1,027,747
50,000
41,110
8,890
18,857
1,018,857
50,000
40,754
9,246
9,611
1,009,611
50,000
40,389 *
9,611
0
1,000,000
* Rounded
15-105
Redeeming (Paying Off)

Bonds Payable
15-106
When they mature, make the simple entry

Bonds Payable
(DEBIT)
Cash
(CREDIT)
If paid before maturity
Compare carrying value of the bonds with the

cash paid to retire the bonds
If retirement price < carrying value, have gain
If retirement price > carrying value, have loss
Is a loss a debit or credit?
Debit
Credit
Gain or loss reported where?

Early extinguishment (retirement) of debt (Chap.13)
15-107
Bond Redemption Sinking Fund

May be required by
bond indenture
i.e., contract
Sinking
Sinking
Fund
Fund
Fund is used to
redeem bonds and
pay interest
Classified as
Investments or
Other Assets
Have we bitten off more

than we can chew?
Kmbekibek;
Rices Students Only

Click the keypad to answer required
virtual keypad questions.
15-108

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15-1

Three Ways Corporations

Borrow from Bank

Borrow from Investors

Forget U. S. Government Savings Bonds.

Nature of Bond Transactions

Nature of Bond Transactions

Other Types of Loans

Auto or Home Loan vs.

Level Periodic Payments

Level Periodic Payments

(Includes principal & interest)

(Includes interest only)

Bonds vs. Stock

Bonds vs. Stock

Bonds vs. Stock

Bonds vs. Stock

Bonds vs. Stock

Dividends Are Not

Bonds vs. Stock

Know advantages of issuing debt (p. 545)

A/K/A Trading on the equity

Know disadvantages of issuing debt (546)

Favorable Financial Leverage

(Using borrowed funds to increase EPS)

Bonds Payable Terms

Bonds Payable Terms

1. Face Value = Maturity Value

Bonds Payable Terms

1. Face Value = Maturity Value

Bonds Payable Terms

1. Face Value = Maturity Value

Bonds Payable Terms

Face Value = Maturity Value

Bonds Payable Terms

Face Value = Maturity Value

Maturity Date 12/31/99

Bonds Payable Terms

Maturity Date 12/31/99

Face Value = Maturity Value

Bonds Issued at Face Value

On 12/31/94 Graphics Inc. issues 10 bonds

Bonds Issued at Face Value

Bonds Issued at Face Value

Bonds Issued at Face Value

Bonds Issued at Face Value

Bonds Issued at Face Value

Bonds Issued at Face Value

Bonds Issued Between

Bonds Issued Between

When bonds are sold between the

The face value of the bonds

The accrued interest since the bonds date

Bonds Issued Between

Bonds Issued Between

Repayment of the interest received from

Interest earned by the bondholders since

Bonds Issued Between

Bonds Issued Between

How much cash is Graphics Inc. going to

Bonds Issued Between

What does the $25,000 in accrued interest

Bonds Issued Between

Prepare the journal entry to record the bond