IPPTChap010 1
IPPTChap010 1
IPPTChap010 1
A trustee
monitors
the bond
. . . investors issue.
10-2
P1
Issuing Bonds at Par
DR CR
Jan. 1 Cash 1,000,000
Bonds Payable 1,000,000
Issued bonds at par
10-3
P1
Interest Expense on Bonds at Par
10-4
P1
Issuing Bonds at Par
DR CR
Dec. 31 Bonds Payable 1,000,000
Cash 1,000,000
Paid bond principal at maturity
10-7
P2
Issuing Bonds at a Discount
Cash
Par Value Proceeds Discount
$1,000,000 - $ 926,405 = $ 73,595
$1,000,000 92.6405%
10-8
P2
Issuing Bonds at a Discount
10-9
P2 Making the First Interest Payment
and Amortizing the Discount
Partial Balance Sheet as of Jan. 1, 2013
Long-Term Liabilities:
Bonds Payable $ 1,000,000
Less: Discount on Bonds Payable 73,595 $ 926,405
Maturity
Value
Using the straight-line method, the Carrying
discount amortization will be $7,360 Value
every six months.
$73,595 10 periods = $7,360*
*(rounded)
10-10
P2 Making the First Interest Payment
and Amortizing the Discount
Make the following entry every six months to
record the cash interest payment and the
amortization of the discount.
DR CR
June 30 Bond Interest Expense 57,360
Discount on Bonds Payable 7,360
Cash 50,000
Paid semiannual interest and amortized discount
57,000
56,000 Effective Interest Method
55,000
54,000 12/31/2008 12/31/2009 12/31/2010
LifeMethod
Straight-Line of the Bond 57,360 57,360 57,360
Effective Interest Method 55,919 56,650 57,472
10-13
P3
Issuing Bonds at a Premium
10-14
P3
Issuing Bonds at a Premium
Cash
Proceeds Par Value Premium
$1,081,145 - $ 1,000,000 = $ 81,145
$1,000,000 108.1145%
Premium on Adjunct-Liability
Bonds Payable Bonds Payable
(or accretion)
1,000,000 81,145
Account
10-16
P3 Making the First Interest Payment
and Amortizing the Bond Premium
Partial Balance Sheet as of Jan. 1, 2013
Long-Term Liabilities: DR CR
Bonds Payable $ 1,000,000
Add: Premium on Bonds Payable 81,145 $ 1,081,145
10-17
P3 Making the First Interest Payment
and Amortizing the Bond Premium
This entry is made every six months to
record the cash interest payment and the
amortization of the premium.
DR CR
June 30 Bond Interest Expense 41,885
Premium on Bonds Payable 8,115
Cash 50,000
Paid semiannual interest and amortized premium
Bond Retirement
10-20
P4
Bond Retirement
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
10-21
C1
Long-Term Notes Payable
Cash
Single Payment of
Principal plus Interest
(at maturity)
Company Lender
Single Payment of
Principal plus
Interest
Regular Payments of
Principal plus Interest
(Over the life of the bond)
Company Lender
Regular Payments of Principal plus Interest
$14,000 Annual
$12,000 payments
$10,000
are constant.
$8,000 Interest
$6,000 Principal
$4,000
$2,000
$-
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
10-27
A2
Types of Bonds
Secured or Convertible
Unsecured and/or
Callable
Term or Registered or
Serial Bearer
10-28
A3
Debt-to-Equity Ratio
10-30
C2 Figuring the
Present Value of a Bond
Table Present
Cash Flow Table Value Amount Value
Par value of the bond PV of $1 0.5584 $ 1,000,000 $ 558,400
Interest (annuity) PV of an
Annuity of $1 7.3601 50,000 368,005
Price of bond $ 926,405
e ns e =
s t Ex p
Int ere
Accrued interest
10-33
C3 Issuing Bonds between
Interest Dates
Apr. 1, 2013 June 30, 2013
Jan. 1, 2013 Bond Issue First Interest
Bond Date Date Payment
Investor
receives 6
months
interest.
10-34
C3 Issuing Bonds between
Interest Dates
Prepare the entry to record the following bond
issue by King Co. on Apr. 1, 2013.
Par value = $1,000,000
Stated interest rate = 10%
Market interest rate = 10%
Interest dates = 6/30 and 12/31
Bond date = Jan. 1, 2013
Maturity date = Dec. 31, 2017 (5 years)
Issue price of bonds $ 1,000,000
Accrued interest
$1,000,000 10% 3/12 = 25,000
Total cash received $ 1,025,000
10-35
C3 Issuing Bonds between
Interest Dates
At the date of issue, the following entry is made:
DR CR
Apr. 1 Cash 1,025,000
Interest Payable 25,000
Bonds Payable 1,000,000
Issued bonds at par plus accrued interest
End of
accounting
Interest Payment Dates period
Jan. 1 Apr. 1 Oct. 1 Dec. 31
3 months
accrued interest
10-37
End of Chapter 10
10-38