May 5 2013 Issuing corporation Bonds payable Interest expense I Chapter 8 a Notes 1 Bonds Investor Bondholder Investment in bonds Interest revenue a Notes 1 Investment in bonds is an asset 2 Interest revenue is earned 3 Bonds payable are liabilities 4 Interest expense is paid 2 Held to maturity investments a Recorded at amortized cost 1 Interest is divided by 2 b Interest received semi annually Issued in 1 000 denominations c d Price is quoted as percent of par 1 Fluctuates with market interest rates a If market rate face rate sell at discount b If market rate face rate sell at premium 2 Par is the principal to be received at maturity a Also known as face value e Examples 1 Bond is quoted at 95 2 so it is 95 2 of face 2 Bond is quoted at 101 3 so it is 101 3 of face a Face value is 1 000 1 1 000 0 952 952 a 952 is discount a Face value is 1 000 1 1 000 1 013 1 013 a 1 013 is par or face f Accounting for held to maturity investments 1 Initially recorded at cost 2 Interest revenue recorded at semiannual interest payment date 3 Premium or discount is amortized a Carrying value is adjusted towards face value b Amortized means spread over life 4 Face value received at maturity a Example 1 Bond is quoted at 95 2 so it is 95 2 of face a Face value is 10 000 1 10 000 0 952 9 520 Discount Journal Date 04 01 Accounts and explanation Long term investment in bonds Cash 10 01 Cash Debit 9 520 300 Credit 9 520 10 01 Interest revenue Long term investment in bonds Interest revenue 60 300 60 b Notes 1 Discounts 2 Note 1 10 000 0 06 year 300 2 10 000 9 520 48 months 6 months 60 g Amortization of held to maturity investments a Increases long term investment account as it reaches maturity b Records interest revenue earned from carrying amount increase a Premiums are opposite of discounts 3 Available for sale investments a May be debt securities not held to maturity or equity securities b Initially recorded at cost c Adjusted to current fair value at balance sheet date d Accounting for available for sale investments Percentage ownership by the investor Less than 20 20 50 Greater than50 GAAP accounting method Fair market value Equity Consolidation e Example 1 1 000 shares of stock at 44 per share 2 Intend to hold investment for longer than one year 3 Receive cash dividend of 0 20 Journal Date 04 01 Accounts and explanation Long term investment Debit 44 000 Cash 10 01 Cash 200 Dividend revenue Credit 44 000 200 a Notes 1 1 000 shares 44 per share 44 000 2 1 000 shares 0 20 200 4 Time value of money a Formula b Future value 1 Future value Present value 1 Interest rate 1 Value a current investment will be worth a specified date in the future 2 Due to interest revenue 3 Inputs needed a Amount of initial payment b Length of time Interest rate c c Present value 1 What amount in the future is worth today 2 Often called discounting 3 To simplify calculations a Present value tables b Excel software 4 Single amount of annuity 5 Present value of investments in bonds a Market value price of bonds equals 1 Present value of principal received at maturity a Single amount 1 Face value 2 Present value of interest payments a Annuity 1 Every 6 months 6 Which table to use a Present value of 1 1 Single payment 2 Cash inflow b Present value of annuity of 1 1 2 or more payments a Equal amounts b Homework problems 1 S8 1 a Mail 4 You completed these long term available for sale investment transactions during 2012 1 April 10 2 July 22 3 December 31 a Purchased 600 shares of Tycon stock paying 17 per share b Mail 4 You intends to hold the investment for the indefinite future a Received a cash dividend of 1 24 per share on the Tycon stock a Adjusted the Tycon investment to its current market value of 5 500 b Journalize Mail 4 You s investment transactions Explanations are not required Journal Accounts and explanation Date 04 10 Available for sale investment Debit 10 200 Cash 07 22 Cash 12 31 Unrealized loss Dividend revenue Allowance to adjust 1 Notes a 600 shares 17 per share 10 200 b 600 shares 1 24 per share 744 c 10 200 5 500 4 700 Credit 10 200 744 4 700 744 4 700 c Assume the Tycon stock is Mail 4 You s only investment Explain how these transactions will be reflected on Mail 4 You s income statement and its statement of other comprehensive income 1 Income statement a Dividend revenue of 744 2 Statement of other comprehensive income a Unrealized loss of 4 700 d Show how to report the investment and any unrealized gain or loss on Mail 4 You s balance sheet at December 31 2012 Ignore income tax Balance sheet ASSETS STOCKHOLDERS EQUITY Total current assets Long term available for sale investments at market value Common stock Retained earnings Accumulated other comprehensive income Unrealized loss on investments x xx 5 500 x xx x xx 4 700 2 S8 9 a Calculate the present value of the following amounts 1 10 000 at the end of 5 years at 8 a Which table would you use 1 Present value of 1 b Present value 1 8 5 years 0 681 a 10 000 0 681 6 810 a Which table would you use 1 Present value of annuity of 1 b Present value 1 8 5 years 3 993 a 10 000 3 993 39 930 2 10 000 a year at the end of the next of 5 years at 8 c Practice questions the balance sheet date a True market value 1 GAAP requires companies to adjust their available for sale securities to market value as of 2 On the balance sheet available for sale investments in stock are reported at their current 3 Unrealized gains and losses from available for sale investments arise from changes in the market value of the investment 4 Realized gains and losses from available for sale investments arise from the sale of the investment a False 5 On the maturity date of the bond the bondholder will receive the bond s present value 6 The process of determining the present value is called discounting because the present value is more than the future value a False 7 The principal is the amount borrowed or invested a True 8 On January 1 2012 Plymouth Company purchases 100 000 6 bonds at a price of 90 4 and a maturity date of January 1 2016 Interest is paid semiannually on January 1 and July 1 Plymouth Company has a calendar year end The entry to record the purchase of the bond investment on July 1 2012 …