Chapter 15-2 Issuing bonds at face value Discount or premium Issuing bonds at a discount Issuing bonds at a premium Bonds Basics Accounting for Bond Issues Accounting for Bond Retirements Accounting for Other Long-Term Liabilities Statement Presentation and Analysis Types of bonds Issuing procedures Trading Market value Redeeming bonds at maturity Redeeming bonds before maturity Converting bonds into common stock Long-term notes payable Lease liabilities PresentationAnalysis Long-Term Liabilities
Chapter 15-3 Bonds are: interest-bearing notes payable issued by corporations, universities, and governmental agencies like common stock, can be sold in small denominations (usually a thousand dollars) attract many investors Bond Basics LO 1 Explain why bonds are issued.
Chapter 15-4 To obtain large amounts of long-term capital, management usually must decide whether to issue bonds or to use equity financing (common stock). Three advantages over common stock: Bond Basics LO 1 Explain why bonds are issued. 1. Stockholder control is not affected. 2. Tax savings result. 3. Earnings per share may be higher. Two disadvantages over common stock: 1)Interest must be paid on a periodic basis 2)Principal (face value) must be repaid at maturity
Chapter 15-5 Effects on earnings per share—stocks vs. bonds. Bond Basics LO 1 Explain why bonds are issued. Illustration 15-2
Chapter 15-6 Types of Bonds: Secured and Unsecured Secured Bonds: also called debenture bonds are issued against the general credit of the barrower. Secured Bonds: also called debenture bonds are issued against the general credit of the barrower. Unsecured Bonds: have specific assets of the issuer pledged as collateral for the bonds Unsecured Bonds: have specific assets of the issuer pledged as collateral for the bonds Ex. Mortgage Ex. Mortgage
Chapter 15-7 Types of Bonds: Term and Serial Bonds 3) Term bonds - bonds that mature at a single specified future date 4) Serial bonds - bonds that mature in installments
Chapter 15-8 Types of Bonds Convertible and Callable Convertible convert the bonds into common stock at holder’s option Callable subject to call and retirement at a stated dollar amount prior to maturity at the option of the issuer
Chapter 15-9 Issuing Procedures Bond contract is 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 has a $1,000 face value. Interest payments are usually made semiannually. Generally issued when the amount of capital needed is too large for one lender to supply. Bond Basics LO 1 Explain why bonds are issued.
Chapter Bond Basics LO 1 Explain why bonds are issued. Issuer of Bonds Issuer of Bonds Maturity Date Maturity Date Illustration 15-3 Contractual Interest Rate Contractual Interest Rate Face or Par Value Face or Par Value
Chapter 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, 3.the market rate of interest. Bond Basics - Bond Basics - Determining the Market Value of Bonds LO 1 Explain why bonds are issued. The features of a bond (callable, convertible, etc) affect the market rate of the bond. A corporation only makes journal entries when it issues or buys back bonds, and when bondholders convert bonds into common stock. Transactions between a bondholder and other investors are not journalized by the issuing corporation.
Chapter Illustration: On January 1, 2010, San Marcos HS issues $100,000, three-year, 8% bonds at 100 (100% of face value). Interest is paid annually each Dec. 31. Issuing Bonds at Face Value LO 2 Prepare the entries for the issuance of bonds and interest expense. Jan. 1Cash 100,000 Bonds payable100,000 Dec. 31Interest expense8,000 Cash8,000 Companies classify bond interest payable as a current liability.
Chapter The Real World Issuing bonds at a $ amount different from face value is quite common. (Meaning… a $1,000 bond does not always sell for $1,000.) Why? 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 (face) rate are the same.
Chapter % 8% 10% Premium Face Value Discount Assume Contractual (Face) Rate of 8% Accounting for Bond Issues LO 2 Prepare the entries for the issuance of bonds and interest expense. $1,000 Face Value Bonds Sold At… Market Interest
Chapter Illustration: On January 1, 2010, San Marcos HS issues $100,000, three-year, 8% bonds for $95,027 (95.027% of face value). Issuing Bonds at a Discount LO 2 Prepare the entries for the issuance of bonds and interest expense. Jan. 1Cash 95,027 Discount on bonds payable4,973 Bonds payable100,000 Although discount on bonds payable has a debt balance, it is not an asset.
Chapter Illustration: On January 1, 2010, San Marcos HS issues $100,000, three-year, 8% bonds for $105,346 ( % of face value). Issuing Bonds at a Premium LO 2 Prepare the entries for the issuance of bonds and interest expense. Jan. 1Cash 105,346 Premium on bonds payable5,346 Bonds payable100,000
Chapter 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 Liabilities LO 4 Describe the accounting for long-term notes payable.
Chapter Lease Liabilities - A lease is a contract between a lessor (owner of the property) and a lessee (renter of the property). Accounting for Other Long-Term Liabilities Illustration 15-13