Beruflich Dokumente
Kultur Dokumente
Interest on bonds is
tax deductible.
A trustee
monitors
the bond
. . . investors issue.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
A1
Basics of Bonds
Corporation Investors
Bond Selling Price
Bond Certificate
at Par Value
Corporation Investors
Bond Interest Payments
Interest Payment =
Bond Issue
Bond Par Value × Stated Interest
Date
Rate
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
A2
Basics of Bonds
Corporation Investors
DR CR
Jan. 1 Cash 1,000,000
Bonds payable 1,000,000
Issued bonds at par
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
P1
Issuing Bonds at Par
DR CR
Dec. 31 Bonds payable 1,000,000
Cash 1,000,000
Paid bond principal at maturity
The debt has now been
extinguished.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
P1
Bond Discount or Premium
$1,000,000 × 92.6405%
DR CR
Jan. 1 Cash 926,405
Discount on bonds payable 73,595
Bonds payable 1,000,000
Sold bonds at a discount on issue date
Contra-Liability
Account
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
P2
Issuing Bonds at a Discount
Partial Balance Sheet as of Jan. 1, 2008
Long-term Liabilities: DR CR
Bonds Payable $ 1,000,000
Less: Discount on Bonds Payable 73,595 $ 926,405
Maturity Value
$1,000,000 × 108.1145%
Adjunct-Liability
Account
Long-term Liabilities: DR CR
Bonds Payable $ 1,000,000
Add: Premium on Bonds Payable 81,145 $ 1,081,145
Interest (annuity) PV of an
Annuity of $1 7.3601 50,000 368,005
Price of bond $ 926,405
• At Maturity DR CR
Dec. 31 Bonds payable 1,000,000
Cash 1,000,000
Retirement of bonds at maturity
• Before Maturity
• Carrying Value > Retirement Price =
Gain
• Carrying Value < Retirement Price =
Loss
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
A2
Types of Bonds
Are you
ready to
discuss long-
term notes
payable?
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
C1
Long-Term Notes Payable
Cash
Single Payment of
Principal plus Interest
Company Lender
Single Payment of
Principal plus
Interest
Regular Payments of
Principal plus Interest
Company Lender
Regular Payments of Principal plus Interest
$16,000 Annual
$14,000 payments
$12,000 decrease.
$10,000
Interest
$8,000
Principal
$6,000
$4,000
$2,000
$-
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
$14,000 Annual
$12,000 payments are
$10,000
constant.
$8,000 Interest
$6,000 Principal
$4,000
$2,000
$-
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Accrued interest
Investor
receives 6
months’
interest.