Chapter 15-1
Chapter 15-2
Chapter 15
Accounting Principles, Ninth Edition
Long-Term Liabilities
Chapter 15-3
1. Explain why bonds are issued.
2. Prepare the entries for the issuance of bonds and interest expense.
3. Describe the entries when bonds are redeemed or converted.
4. Describe the accounting for long-term notes payable.
5. Contrast the accounting for operating and capital leases.
6. Identify the methods for the presentation and analysis of long-term liabilities.
Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives
Chapter 15-4
Issuing bonds Issuing bonds at face valueat face value
Discount or Discount or premiumpremium
Issuing bonds Issuing bonds at a discountat a discount
Issuing bonds Issuing bonds at a premiumat a premium
Bonds BasicsBonds BasicsBonds BasicsBonds Basics Bond IssuesBond IssuesBond IssuesBond Issues Bond Bond RetirementsRetirements
Bond Bond RetirementsRetirements
Other Long-Other Long-Term Term
LiabilitiesLiabilities
Other Long-Other Long-Term Term
LiabilitiesLiabilities
Statement Statement Presentation Presentation and Analysisand Analysis
Statement Statement Presentation Presentation and Analysisand Analysis
Types of Types of bondsbonds
Issuing Issuing proceduresprocedures
TradingTrading
Market valueMarket value
Redeeming Redeeming bonds at bonds at maturitymaturity
Redeeming Redeeming bonds before bonds before maturitymaturity
Converting Converting bonds into bonds into common common stockstock
Long-term Long-term notes payablenotes payable
Lease Lease liabilitiesliabilities
PresentationPresentation
AnalysisAnalysis
Long-Term LiabilitiesLong-Term LiabilitiesLong-Term LiabilitiesLong-Term Liabilities
Chapter 15-5
Bonds are a form of interest-bearing notes payable.
Three advantages over common stock:
Bond BasicsBond BasicsBond BasicsBond Basics
SO 1 Explain why bonds are issued.SO 1 Explain why bonds are issued.
1. Stockholder control is not affected.
2. Tax savings result.
3. Earnings per share may be higher.
Chapter 15-6
Effects on earnings per share—stocks vs. bonds.
Bond BasicsBond BasicsBond BasicsBond Basics
SO 1 Explain why bonds are issued.SO 1 Explain why bonds are issued.
Illustration 15-2
Chapter 15-7
The major disadvantages resulting from the use of bonds are:
a. that interest is not tax deductible and the principal must be repaid.
b. that the principal is tax deductible and interest must be paid.
c. that neither interest nor principal is tax deductible.
d. that interest must be paid and principal repaid.
QuestionQuestion
Bond BasicsBond BasicsBond BasicsBond Basics
SO 1 Explain why bonds are issued.SO 1 Explain why bonds are issued.
Chapter 15-8
Types of Bonds
Secured and Unsecured (debenture) bonds.
Term and Serial bonds.
Registered and Bearer (or coupon) bonds.
Convertible and Callable bonds.
Bond BasicsBond BasicsBond BasicsBond Basics
SO 1 Explain why bonds are issued.SO 1 Explain why bonds are issued.
Chapter 15-9
Issuing Procedures
Bond contract known as a bond indenture.
Represents a promise to pay:
(1) sum of money at designated maturity date, plus
(2) periodic interest at a contractual (stated) rate on the maturity amount (face value).
Paper certificate, typically a $1,000 face value.
Interest payments usually made semiannually.
Generally issued when the amount of capital needed is too large for one lender to supply.
Bond BasicsBond BasicsBond BasicsBond Basics
SO 1 Explain why bonds are issued.SO 1 Explain why bonds are issued.
Chapter 15-10
Bond BasicsBond BasicsBond BasicsBond Basics
SO 1 Explain why bonds are issued.SO 1 Explain why bonds are issued.
Issuer of Bonds
Issuer of Bonds
MaturityDate
MaturityDate
Illustration 15-3
Contractual Interest
Rate
Contractual Interest
Rate
Face or Par ValueFace or
Par Value
Chapter 15-11
Bond TradingBonds traded on national securities exchanges.
Newspapers and the financial press publish bond prices and trading activity daily.
Bond BasicsBond BasicsBond BasicsBond Basics
SO 1 Explain why bonds are issued.SO 1 Explain why bonds are issued.
Read as: Outstanding 5.125%, $1,000 bonds that mature in 2011. Currently yield a 5.747% return. On this day, $33,965,000 of these bonds were traded. Closing price was 96.595% of face value, or $965.95.
Chapter 15-12
Determining the Market Value of Bonds
Market value is a function of the three factors that determine present value:
1. the dollar amounts to be received,
2. the length of time until the amounts are received, and
3. the market rate of interest.
Bond BasicsBond BasicsBond BasicsBond Basics
SO 1 Explain why bonds are issued.SO 1 Explain why bonds are issued.
The features of a bond (callable, convertible, and so on) affect the market rate of the bond.
Chapter 15-13
6%
8%
10%
Premium
Face Value
Discount
Assume Contractual Rate of 8%Assume Contractual Rate of 8%
Accounting for Bond IssuesAccounting for Bond IssuesAccounting for Bond IssuesAccounting for Bond Issues
SO 2 Prepare the entries for the issuance of bonds and interest expense.
Bonds Sold AtMarket Interest
Chapter 15-14 SO 2 Prepare the entries for the issuance of bonds and interest
expense.
The rate of interest investors demand for loaning funds to a corporation is the:
a. contractual interest rate.
b. face value rate.
c. market interest rate.
d. stated interest rate.
QuestionQuestion
Accounting for Bond IssuesAccounting for Bond IssuesAccounting for Bond IssuesAccounting for Bond Issues
Chapter 15-15 SO 2 Prepare the entries for the issuance of bonds and interest
expense.
Karson Inc. issues 10-year bonds with a maturity value of $200,000. If the bonds are issued at a premium, this indicates that:
a. the contractual interest rate exceeds the market interest rate.
b. the market interest rate exceeds the contractual interest rate.
c. the contractual interest rate and the market interest rate are the same.
d. no relationship exists between the two rates.
QuestionQuestion
Accounting for Bond IssuesAccounting for Bond IssuesAccounting for Bond IssuesAccounting for Bond Issues
Chapter 15-16
Illustration: On January 1, 2010, CandlestickCorporation issues $100,000, five-year, 10% bonds at 100 (100% of face value). The entry to record the sale is:
Issuing Bonds at Face ValueIssuing Bonds at Face ValueIssuing Bonds at Face ValueIssuing Bonds at Face Value
SO 2 Prepare the entries for the issuance of bonds and interest expense.
Jan. 1 Cash 100,000
Bonds payable 100,000
Chapter 15-17
Illustration: On January 1, 2010, CandlestickCorporation issues $100,000, five-year, 10% bonds at 100 (100% of face value). Assume that interest ispayable semiannually on January 1 and July 1. Prepare the entry to record the payment of interest on July 1, 2010, assume no previous accrual.
Issuing Bonds at Face ValueIssuing Bonds at Face ValueIssuing Bonds at Face ValueIssuing Bonds at Face Value
SO 2 Prepare the entries for the issuance of bonds and interest expense.
July 1 Bond interest expense 5,000
Cash 5,000
Chapter 15-18
Illustration: On January 1, 2010, CandlestickCorporation issues $100,000, five-year, 10% bonds at 100 (100% of face value). Assume that interest ispayable semiannually on January 1 and July 1. Prepare the entry to record the accrual of interest on December 31, 2010, assume no previous accrual.
Issuing Bonds at Face ValueIssuing Bonds at Face ValueIssuing Bonds at Face ValueIssuing Bonds at Face Value
SO 2 Prepare the entries for the issuance of bonds and interest expense.
Dec. 31 Bond interest expense 5,000
Bond interest payable 5,000
Chapter 15-19
Issuing Bonds at a DiscountIssuing Bonds at a DiscountIssuing Bonds at a DiscountIssuing Bonds at a Discount
SO 2 Prepare the entries for the issuance of bonds and interest expense.
Illustration: On January 1, 2010, Candlestick, Inc. sells $100,000, five-year, 10% bonds for $92,639 (92.639% of face value). Interest is payable on July 1 and January 1. The entry to record the issuance is:Jan. 1 Cash 92,639
Discount on bonds payable 7,361
Bond payable 100,000
Chapter 15-20
Statement PresentationStatement Presentation
Issuing Bonds at a DiscountIssuing Bonds at a DiscountIssuing Bonds at a DiscountIssuing Bonds at a Discount
SO 2 Prepare the entries for the issuance of bonds and interest expense.
Illustration 15-6
Chapter 15-21
Issuing Bonds at a DiscountIssuing Bonds at a DiscountIssuing Bonds at a DiscountIssuing Bonds at a Discount
SO 2 Prepare the entries for the issuance of bonds and interest expense.
Total Cost of BorrowingTotal Cost of Borrowing
Illustration 15-7
Illustration 15-8
Chapter 15-22 SO 2 Prepare the entries for the issuance of bonds and interest
expense.
Discount on Bonds Payable:
a. has a credit balance.
b. is a contra account.
c. is added to bonds payable on the balance sheet.
d. increases over the term of the bonds.
QuestionQuestion
Issuing Bonds at a DiscountIssuing Bonds at a DiscountIssuing Bonds at a DiscountIssuing Bonds at a Discount
Chapter 15-23 SO 2 Prepare the entries for the issuance of bonds and interest
expense.
Illustration: On January 1, 2010, Candlestick, Inc. sells $100,000, five-year, 10% bonds for $108,111 (108.111% of face value). Interest is payable on July 1 and January 1. The entry to record the issuance is:Jan. 1 Cash 108,111
Bonds payable 100,000
Premium on bond payable 8,111
Issuing Bonds at a PremiumIssuing Bonds at a PremiumIssuing Bonds at a PremiumIssuing Bonds at a Premium
Chapter 15-24
Statement PresentationStatement Presentation
SO 2 Prepare the entries for the issuance of bonds and interest expense.
Issuing bonds at an amount different from face value is quite common. By the time a company prints the bond certificates and markets the bonds, it will be a coincidence if the market rate and the contractual rate are the same.
Issuing Bonds at a PremiumIssuing Bonds at a PremiumIssuing Bonds at a PremiumIssuing Bonds at a Premium
Illustration 15-9
Chapter 15-25 SO 2 Prepare the entries for the issuance of bonds and interest
expense.
Total Cost of BorrowingTotal Cost of Borrowing
Illustration 15-10
Illustration 15-11
Issuing Bonds at a PremiumIssuing Bonds at a PremiumIssuing Bonds at a PremiumIssuing Bonds at a Premium
Chapter 15-26
Redeeming Bonds at Maturity
Accounting for Bond RetirementsAccounting for Bond RetirementsAccounting for Bond RetirementsAccounting for Bond Retirements
SO 3 Describe the entries when bonds are redeemed or SO 3 Describe the entries when bonds are redeemed or converted.converted.
Assuming that the company pays and records separately the interest for the last interest period, Candlestick records the redemption of its bonds at maturity as follows:
Bond payable 100,000
Cash 100,000
Chapter 15-27
Redeeming Bonds before Maturity
When a company retires bonds before maturity, it is necessary to:
1. eliminate the carrying value of the bonds at the redemption date;
2. record the cash paid; and
3. recognize the gain or loss on redemption.
The carrying value of the bonds is the face value of the bonds less unamortized bond discount or plus unamortized bond premium at the redemption date.
Accounting for Bond RetirementsAccounting for Bond RetirementsAccounting for Bond RetirementsAccounting for Bond Retirements
SO 3 Describe the entries when bonds are redeemed or SO 3 Describe the entries when bonds are redeemed or converted.converted.
Chapter 15-28 SO 3 Describe the entries when bonds are redeemed or SO 3 Describe the entries when bonds are redeemed or
converted.converted.
When bonds are redeemed before maturity, the gain or loss on redemption is the difference between the cash paid and the:
a. carrying value of the bonds.
b. face value of the bonds.
c. original selling price of the bonds.
d. maturity value of the bonds.
QuestionQuestion
Accounting for Bond RetirementsAccounting for Bond RetirementsAccounting for Bond RetirementsAccounting for Bond Retirements
Chapter 15-29
Illustration: Assume Candlestick, Inc. has sold its bonds at a premium. At the end of the eighth period, Candlestick retires these bonds at 103 after paying the semiannual interest. The carrying value of the bonds at the redemption date is $101,623. Candlestick makes the following entry to record the redemption at the end of the eighth interest period (January 1, 2014):
Bonds payable 100,000
Premium on bonds payable 1,623
Loss on redemption 1,377
Cash 103,000
Accounting for Bond RetirementsAccounting for Bond RetirementsAccounting for Bond RetirementsAccounting for Bond Retirements
SO 3 Describe the entries when bonds are redeemed or SO 3 Describe the entries when bonds are redeemed or converted.converted.
Chapter 15-30
Converting Bonds into Common Stock
Until conversion, the bondholder receives interest on the bond.
For the issuer, the bonds sell at a higher price and pay a lower rate of interest than comparable debt securities without the conversion option.
Upon conversion, the company transfers the carrying value of the bonds to paid-in capital accounts. No gain or loss is recognized.
Accounting for Bond RetirementsAccounting for Bond RetirementsAccounting for Bond RetirementsAccounting for Bond Retirements
SO 3 Describe the entries when bonds are redeemed or SO 3 Describe the entries when bonds are redeemed or converted.converted.
Chapter 15-31
Illustration: Assume that on July 1 Saunders Associates converts $100,000 bonds sold at face value into 2,000 shares of $10 par value common stock. Both the bonds and the common stock have a market value of $130,000. Saunders makes the following entry to record the conversion:
Bonds payable 100,000
Common stock (2,000 x $10) 20,000
Paid-in capital in excess of par 80,000
Accounting for Bond RetirementsAccounting for Bond RetirementsAccounting for Bond RetirementsAccounting for Bond Retirements
SO 3 Describe the entries when bonds are redeemed or SO 3 Describe the entries when bonds are redeemed or converted.converted.
Chapter 15-32
When bonds are converted into common stock:
a. a gain or loss is recognized.
b. the carrying value of the bonds is transferred to paid-in capital accounts.
c. the market price of the stock is considered in the entry.
d. the market price of the bonds is transferred to paid-in capital.
QuestionQuestion
Accounting for Bond RetirementsAccounting for Bond RetirementsAccounting for Bond RetirementsAccounting for Bond Retirements
SO 3 Describe the entries when bonds are redeemed or SO 3 Describe the entries when bonds are redeemed or converted.converted.
Chapter 15-33
Long-Term Notes Payable
May be secured by a mortgage that pledges title to specific assets as security for a loan
Typically, the terms require the borrower to make installment payments over the term of the loan. Each payment consists of
1. interest on the unpaid balance of the loan and
2. a reduction of loan principal.
Companies initially record mortgage notes payable at face value.
Accounting for Other Long-Term Accounting for Other Long-Term LiabilitiesLiabilitiesAccounting for Other Long-Term Accounting for Other Long-Term LiabilitiesLiabilities
SO 4 Describe the accounting for long-term notes payable.
Chapter 15-34
Illustration: Porter Technology Inc. issues a $500,000, 12%, 20-year mortgage note on December 31, 2010. The terms provide for semiannual installment payments of $33,231 (not including real estate taxes and insurance). The installment payment schedule for the first two years is as follows.
Accounting for Other Long-Term Accounting for Other Long-Term LiabilitiesLiabilitiesAccounting for Other Long-Term Accounting for Other Long-Term LiabilitiesLiabilities
SO 4 Describe the accounting for long-term notes payable.
Illustration 15-12
Chapter 15-35
Accounting for Other Long-Term Accounting for Other Long-Term LiabilitiesLiabilitiesAccounting for Other Long-Term Accounting for Other Long-Term LiabilitiesLiabilities
SO 4 Describe the accounting for long-term notes payable.
Illustration: Porter Technology Inc. issues a $500,000, 12%, 20-year mortgage note on December 31, 2010. The terms provide for semiannual installment payments of $33,231 (not including real estate taxes and insurance). The installment payment schedule for the first two years is as follows.
Dec. 31 Cash 500,000Mortgage notes payable 500,000
Jun. 30 Interest expense 30,000Mortgage notes payable 3,231
Cash 33,231
Chapter 15-36
Each payment on a mortgage note payable consists of:
a. interest on the original balance of the loan.
b. reduction of loan principal only.
c. interest on the original balance of the loan and reduction of loan principal.
d. interest on the unpaid balance of the loan and reduction of loan principal.
QuestionQuestion
Accounting for Other Long-Term Accounting for Other Long-Term LiabilitiesLiabilitiesAccounting for Other Long-Term Accounting for Other Long-Term LiabilitiesLiabilities
SO 4 Describe the accounting for long-term notes payable.
Chapter 15-37
Chapter 15-38
Lease Liabilities
A lease is a contractual arrangement between a lessor (owner of the property) and a lessee (renter of the property).
Accounting for Other Long-Term Accounting for Other Long-Term LiabilitiesLiabilitiesAccounting for Other Long-Term Accounting for Other Long-Term LiabilitiesLiabilities
SO 5 Contrast the accounting for operating and capital leases.
Illustration 15-13
Chapter 15-39
Operating LeaseOperating Lease Capital LeaseCapital Lease
Journal Entry:Journal Entry:
Rent expenseRent expense xxx xxx
CashCash xxx xxx
Journal Entry:Journal Entry:
Leased equipment xxxLeased equipment xxx
Lease liability xxxLease liability xxx
The issue of how to report leases is the case of The issue of how to report leases is the case of substance versus form. Although technically legal title may not pass, the . Although technically legal title may not pass, the benefits from the use of the property do.benefits from the use of the property do.
Statement of Financial Accounting Standard No. 13, Statement of Financial Accounting Standard No. 13, “Accounting for Leases,” 1976“Accounting for Leases,” 1976
A lease that transfers substantially all of the benefits and risks A lease that transfers substantially all of the benefits and risks of property ownership should be capitalized (only of property ownership should be capitalized (only noncancellable leases may be capitalized).noncancellable leases may be capitalized).
Accounting for Other Long-Term Accounting for Other Long-Term LiabilitiesLiabilitiesAccounting for Other Long-Term Accounting for Other Long-Term LiabilitiesLiabilities
SO 5 Contrast the accounting for operating and capital leases.
Chapter 15-40
To capitalize a lease, one or more of four criteria must be met:
1. Transfers ownership to the lessee.
2. Contains a bargain purchase option.
3. Lease term is equal to or greater than 75 percent of the estimated economic life of the leased property.
4. The present value of the minimum lease payments (excluding executory costs) equals or exceeds 90 percent of the fair value of the leased property.
Accounting for Other Long-Term Accounting for Other Long-Term LiabilitiesLiabilitiesAccounting for Other Long-Term Accounting for Other Long-Term LiabilitiesLiabilities
SO 5 Contrast the accounting for operating and capital leases.
Chapter 15-41
Exercise: Gonzalez Company decides to lease new equipment. The lease period is four years; the economic life of the leased equipment is estimated to be five years. The present value of the lease payments is $190,000, whichis equal to the fair market value of the equipment. There is no transfer of ownership during the lease term, nor is there any bargain purchase option.Instructions:
(a) What type of lease is this? Explain.
(b) Prepare the journal entry to record the lease.
SO 5 Contrast the accounting for operating and capital leases.
Accounting for Other Long-Term Accounting for Other Long-Term LiabilitiesLiabilitiesAccounting for Other Long-Term Accounting for Other Long-Term LiabilitiesLiabilities
Chapter 15-42
Exercise: (a) What type of lease is this? Explain.
Capitalization Criteria:Capitalization Criteria:
1.1. Transfer of ownershipTransfer of ownership
2.2. Bargain purchase optionBargain purchase option
3.3. Lease term => 75% of Lease term => 75% of economic life of leased economic life of leased propertyproperty
4.4. Present value of Present value of minimum lease payments minimum lease payments => 90% of FMV of => 90% of FMV of propertyproperty
NONO
NONO
Lease term
4 yrs.Economic life
5 yrs. YES
80%
YES - PV and FMV are the same.
Capital Lease?
SO 5 Contrast the accounting for operating and capital leases.
Accounting for Other Long-Term Accounting for Other Long-Term LiabilitiesLiabilitiesAccounting for Other Long-Term Accounting for Other Long-Term LiabilitiesLiabilities
Chapter 15-43
Exercise: (b) Prepare the journal entry to record the lease.
SO 5 Contrast the accounting for operating and capital leases.
Accounting for Other Long-Term Accounting for Other Long-Term LiabilitiesLiabilitiesAccounting for Other Long-Term Accounting for Other Long-Term LiabilitiesLiabilities
The portion of the lease liability expected to be paid in The portion of the lease liability expected to be paid in the next year is a current liability. The remainder is the next year is a current liability. The remainder is classified as a long-term liability.classified as a long-term liability.
Leased asset - equipment 190,000
Lease liability 190,000
Chapter 15-44
The lessee must record a lease as an asset if the lease:
a. transfers ownership of the property to the lessor.
b. contains any purchase option.
c. term is 75% or more of the useful life of the leased property.
d. payments equal or exceed 90% of the fair market value of the leased property.
QuestionQuestion
Accounting for Other Long-Term Accounting for Other Long-Term LiabilitiesLiabilitiesAccounting for Other Long-Term Accounting for Other Long-Term LiabilitiesLiabilities
SO 5 Contrast the accounting for operating and capital leases.
Chapter 15-45
Presentation
SO 6 Identify the methods for the presentation and analysis of long-term liabilities.
Statement Analysis and PresentationStatement Analysis and PresentationStatement Analysis and PresentationStatement Analysis and Presentation
Illustration 15-14
Chapter 15-46
Analysis of Long-Term Debt
Two ratios that provide information about debt-paying ability and long-run solvency are:
Total debt
Total assets
Debt to total
assets
=
The higher the percentage of debt to total assets, the greater the risk that the company may be unable to meet its maturing obligations.
1.1.
SO 6 Identify the methods for the presentation and analysis of long-term liabilities.
Statement Analysis and PresentationStatement Analysis and PresentationStatement Analysis and PresentationStatement Analysis and Presentation
Chapter 15-47
Analysis of Long-Term Debt
Two ratios that provide information about debt-paying ability and long-run solvency are:
Income before income taxes and interest expense
Interest expense
Times interest earned
=
Indicates the company’s ability to meet interest payments as they come due.
2.2.
SO 6 Identify the methods for the presentation and analysis of long-term liabilities.
Statement Analysis and PresentationStatement Analysis and PresentationStatement Analysis and PresentationStatement Analysis and Presentation
Chapter 15-48
Chapter 15-49
To illustrate present value concepts, assume that you are willing to invest a sum of money that will yield $1,000 at the end of one year, and you can earn 10% on your money. What is the $1,000 worth today?
To compute the answer,
divide the future amount by 1 plus the interest rate ($1,000/1.10 = $909.09 OR
use a Present Value of 1 table. ($1,000 X .90909) = $909.09 (10% per period, one period from now).
SO 7 Compute the market price of a bond.SO 7 Compute the market price of a bond.
Present Value Concepts Related to Bond Present Value Concepts Related to Bond PricingPricingPresent Value Concepts Related to Bond Present Value Concepts Related to Bond PricingPricing
Appendix 15APresent Value of Face
Value
Chapter 15-50
To compute the answer,
divide the future amount by 1 plus the interest rate ($1,000/1.10 = $909.09.
Present Value Concepts Related to Bond Present Value Concepts Related to Bond PricingPricingPresent Value Concepts Related to Bond Present Value Concepts Related to Bond PricingPricingPresent Value of Face Value
Illustration 15A-1
SO 7 Compute the market price of a bond.SO 7 Compute the market price of a bond.
Chapter 15-51
To compute the answer,
use a Present Value of 1 table. ($1,000 X .90909) = $909.09 (10% per period, one period from now).
Present Value Concepts Related to Bond Present Value Concepts Related to Bond PricingPricingPresent Value Concepts Related to Bond Present Value Concepts Related to Bond PricingPricingPresent Value of Face Value
SO 7 Compute the market price of a bond.SO 7 Compute the market price of a bond.
Chapter 15-52
The future amount ($1,000), the interest rate (10%), and the number of periods (1) are known
Present Value Concepts Related to Bond Present Value Concepts Related to Bond PricingPricingPresent Value Concepts Related to Bond Present Value Concepts Related to Bond PricingPricingPresent Value of Face Value
SO 7 Compute the market price of a bond.SO 7 Compute the market price of a bond.
Illustration 15A-2
Chapter 15-53
If you are to receive the single future amount of $1,000 in two years, discounted at 10%, its present value is $826.45 [($1,000 1.10) 1.10].
Present Value Concepts Related to Bond Present Value Concepts Related to Bond PricingPricingPresent Value Concepts Related to Bond Present Value Concepts Related to Bond PricingPricingPresent Value of Face Value
SO 7 Compute the market price of a bond.SO 7 Compute the market price of a bond.
Illustration 15A-3
Chapter 15-54
To compute the answer using a Present Value of 1 table. ($1,000 X .82645) = $826.45 (10% per period, two periods from now).
Present Value Concepts Related to Bond Present Value Concepts Related to Bond PricingPricingPresent Value Concepts Related to Bond Present Value Concepts Related to Bond PricingPricingPresent Value of Face Value
SO 7 Compute the market price of a bond.SO 7 Compute the market price of a bond.
Chapter 15-55
In addition to receiving the face value of a bond at maturity, an investor also receives periodic interest payments (annuities) over the life of the bonds.
To compute the present value of an annuity, we need to know:
1) interest rate,
2) number of interest periods, and
3) amount of the periodic receipts or payments.
SO 7 Compute the market price of a bond.SO 7 Compute the market price of a bond.
Present Value Concepts Related to Bond Present Value Concepts Related to Bond PricingPricingPresent Value Concepts Related to Bond Present Value Concepts Related to Bond PricingPricingPresent Value of Interest Payments (Annuities)
Chapter 15-56
Assume that you will receive $1,000 cash annually for three years and the interest rate is 10%.
SO 7 Compute the market price of a bond.SO 7 Compute the market price of a bond.
Present Value Concepts Related to Bond Present Value Concepts Related to Bond PricingPricingPresent Value Concepts Related to Bond Present Value Concepts Related to Bond PricingPricingPresent Value of Interest Payments (Annuities)
Illustration 15A-5
Chapter 15-57
Assume that you will receive $1,000 cash annually for three years and the interest rate is 10%.
SO 7 Compute the market price of a bond.SO 7 Compute the market price of a bond.
Present Value Concepts Related to Bond Present Value Concepts Related to Bond PricingPricingPresent Value Concepts Related to Bond Present Value Concepts Related to Bond PricingPricingPresent Value of Interest Payments (Annuities)
Illustration 15A-6
Chapter 15-58
Assume that you will receive $1,000 cash annually for three years and the interest rate is 10%.
SO 7 Compute the market price of a bond.SO 7 Compute the market price of a bond.
Present Value Concepts Related to Bond Present Value Concepts Related to Bond PricingPricingPresent Value Concepts Related to Bond Present Value Concepts Related to Bond PricingPricingPresent Value of Interest Payments (Annuities)
$1,000 annual payment x 2.48685 = $2,486.85
Chapter 15-59 SO 7 Compute the market price of a bond.SO 7 Compute the market price of a bond.
Present Value Concepts Related to Bond Present Value Concepts Related to Bond PricingPricingPresent Value Concepts Related to Bond Present Value Concepts Related to Bond PricingPricing
Computing the Present Value of a Bond
The selling price of a bond is equal to the sum of:
1) The present value of the face value of the bond discounted at the investor’s required rate of return
PLUS
2) The present value of the periodic interest payments discounted at the investor’s required rate of return
Chapter 15-60
Assume a bond issue of 10%, five-year bonds with a face value of $100,000 with interest payable semiannually on January 1 and July 1.
Illustration 15A-8
SO 7 Compute the market price of a bond.SO 7 Compute the market price of a bond.
Present Value Concepts Related to Bond Present Value Concepts Related to Bond PricingPricingPresent Value Concepts Related to Bond Present Value Concepts Related to Bond PricingPricing
Chapter 15-61
Assume a bond issue of 10%, five-year bonds with a face value of $100,000 with interest payable semiannually on January 1 and July 1.
Illustration 15A-9
SO 7 Compute the market price of a bond.SO 7 Compute the market price of a bond.
Present Value Concepts Related to Bond Present Value Concepts Related to Bond PricingPricingPresent Value Concepts Related to Bond Present Value Concepts Related to Bond PricingPricing
Contractual Rate = Discount Rate Issued at Face Value
Chapter 15-62
Assume a bond issue of 10%, five-year bonds with a face value of $100,000 with interest payable semiannually on January 1 and July 1.
Illustration 15A-10
SO 7 Compute the market price of a bond.SO 7 Compute the market price of a bond.
Present Value Concepts Related to Bond Present Value Concepts Related to Bond PricingPricingPresent Value Concepts Related to Bond Present Value Concepts Related to Bond PricingPricing
Contractual Rate < Discount Rate Issued at a Discount
Chapter 15-63
Assume a bond issue of 10%, five-year bonds with a face value of $100,000 with interest payable semiannually on January 1 and July 1.
Illustration 15A-11
SO 7 Compute the market price of a bond.SO 7 Compute the market price of a bond.
Present Value Concepts Related to Bond Present Value Concepts Related to Bond PricingPricingPresent Value Concepts Related to Bond Present Value Concepts Related to Bond PricingPricing
Contractual Rate > Discount Rate Issued at a Premium
Chapter 15-64
Under the effective-interest method, the amortization of bond discount or bond premium results in period interest expense equal to a constant percentage of the carrying value of the bonds.
Required steps:
SO 8 Apply the effective-interest method of SO 8 Apply the effective-interest method of amortizing bond discount and bond amortizing bond discount and bond premium.premium.
1. Compute the bond interest expense.
2. Compute the bond interest paid or accrued.
3. Compute the amortization amount.
Effective-Interest Method of Bond Effective-Interest Method of Bond AmortizationAmortizationEffective-Interest Method of Bond Effective-Interest Method of Bond AmortizationAmortization
Appendix 15B
Chapter 15-65
Assume Candlestick, Inc. issues $100,000 of 10%, five-year bonds on January 1, 2010, for $92,639, with interest payable each July 1 and January 1. This results in a discount of $7,361.
Illustration 15B-2
Amortizing Bond Discount
Effective-Interest Method of Bond Effective-Interest Method of Bond AmortizationAmortizationEffective-Interest Method of Bond Effective-Interest Method of Bond AmortizationAmortization
SO 8 Apply the effective-interest method of SO 8 Apply the effective-interest method of amortizing bond discount and bond amortizing bond discount and bond premium.premium.
Chapter 15-66
Assume Candlestick, Inc. issues $100,000 of 10%, five-year bonds on January 1, 2010, for $92,639, with interest payable each July 1 and January 1. This results in a discount of $7,361.
Journal entry on July 1, 2010, to record the interest payment and amortization of discount is as follows:
Effective-Interest Method of Bond Effective-Interest Method of Bond AmortizationAmortizationEffective-Interest Method of Bond Effective-Interest Method of Bond AmortizationAmortization
SO 8 Apply the effective-interest method of SO 8 Apply the effective-interest method of amortizing bond discount and bond amortizing bond discount and bond premium.premium.
Interest Expense 5,558
Cash 5,000
Discount on Bonds Payable 558
July 1
Amortizing Bond Discount
Chapter 15-67
Illustration 15B-4
Effective-Interest Method of Bond Effective-Interest Method of Bond AmortizationAmortizationEffective-Interest Method of Bond Effective-Interest Method of Bond AmortizationAmortization
SO 8 Apply the effective-interest method of SO 8 Apply the effective-interest method of amortizing bond discount and bond amortizing bond discount and bond premium.premium.
Amortizing Bond PremiumAssume Candlestick, Inc. issues $100,000 of 10%, five-year bonds on January 1, 2010, for $108,111, with interest payable each July 1 and January 1. This results in a premium of $8,111.
Chapter 15-68
Effective-Interest Method of Bond Effective-Interest Method of Bond AmortizationAmortizationEffective-Interest Method of Bond Effective-Interest Method of Bond AmortizationAmortization
SO 8 Apply the effective-interest method of SO 8 Apply the effective-interest method of amortizing bond discount and bond amortizing bond discount and bond premium.premium.
Interest Expense 4,324
Cash 5,000
Premium on Bonds Payable 676
July 1
Amortizing Bond PremiumAssume Candlestick, Inc. issues $100,000 of 10%, five-year bonds on January 1, 2010, for $108,111, with interest payable each July 1 and January 1. This results in a premium of $8,111.
Journal entry on July 1, 2010, to record the interest payment and amortization of premium is as follows:
Chapter 15-69
Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2010, for $92,639 (discount of $7,361). Interest is payable on July 1 and January 1. The bond discount amortization for each interest period is $736 ($7,361/10).
Illustration 15C-2
Amortizing Bond Discount
Straight-Line AmortizationStraight-Line AmortizationStraight-Line AmortizationStraight-Line Amortization
SO 9 Apply the straight-line method of SO 9 Apply the straight-line method of amortizing amortizing bond discount and bond bond discount and bond premium.premium.
Appendix 15C
Chapter 15-70
Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2010, for $92,639 (discount of $7,361). Interest is payable on July 1 and January 1. The bond discount amortization for each interest period is $736 ($7,361/10).
Journal entry on July 1, 2010, to record the interest payment and amortization of discount is as follows: Interest Expense 5,736
Cash 5,000
Discount on Bonds Payable 736
July 1
Amortizing Bond Discount
Straight-Line AmortizationStraight-Line AmortizationStraight-Line AmortizationStraight-Line Amortization
SO 9 Apply the straight-line method of SO 9 Apply the straight-line method of amortizing amortizing bond discount and bond bond discount and bond premium.premium.
Chapter 15-71
“Copyright © 2009 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.”
CopyrightCopyrightCopyrightCopyright