Investor Bond holder Entity that owns corporation stock investment in bonds interest revenue Investee Corporation that issues stock bonds payable interest expense Held to maturity Recorded at amortized cost interest received semi annually issued in 1000 denominations price as percent of par fluctuate with market interest rates Accounting for held to maturity investments Initially recorded at cost Interest revenue recorded at semiannual interest payment date Premium or discount is amortized Carrying value is adjusted towards face value Face value received at maturity Amortization of held to maturity investment Increases long term investment account as it reaches maturity Records interest revenue earned from carrying amount increases Accounting Methods for Long term Investments Percentage ownership by the investor Less than 20 20 50 Greater than 50 Carrying amount of investment Original cost of investment Debit balance in allowance to adjust investments to market or credit balance in allowance to adjust investments to market Unrealized Gains and Losses Fair value declines Debits unrealized loss on investments Fair value increases credit unrealized gain on investments Present Value What amount in the future is worth today Often called discounting Single amount or annuity Present Value of Investments in Bonds Market price of bonds equal PV of principal received at maturity single amount PV of interest payments annuity Time Value of Money Prefer payments now vs in future due to interest factor Applicable to both personal and business decisions Time Value of Money Factors Principal amount p Single lump sum Annuity Number of periods n Interest rate i Present Value and Future Value PV Interest earned Future Value Contingent Liability Potential Liability that depends on future outcome even Accrue recognized Loss probable Amount estimable Disclose Loss reasonably possible Interest Rates and Bond Prices Bonds are always sold at markets price PV two interest rates to set bond price Stated interest rate coupon rate Printed on bond certificate Determines cash interest paid to bond Market interest rate effective interest Demanded by investors for loaning money Varies minute to minute Stated rate differs from market rate GAAP accounting method Fair market value Equity Consolidation Issue Price of Bonds Payable Case A Stated interest rate Case B Stated interest rate Case C Stated interest rate Market interest rate Therefore Issued at par Market interest rate Therefore Issued at discount Market Interest Rate Therefore Issued at premium Date July 31 Account and explanation Inventory Note payable inventory buy issuing a bond payable Date April 30 Date July31 Account and explanation Interest Expense 11000 x 12 x9 12 Accrued interest expense Account and explanation Note payable short term Interest Payable Interest Expense 1100x 12 x 3 12 Cash Paid note payable and Interest maturity Debit 11 000 Debit 990 Debit 11 000 990 330 Credit 11 000 Credit 990 Credit 12320 30 000 225 Balance sheet April 30 2013 Note payable short term 11000 interest Payable 990 Income Statement April 30 2013 Interest Expense 990 Current Liabilities Obligations due within one year Two types Known amounts Accounts payable amounts owed for products or services purchased on account Accounts payable turnover Days payable outstanding Short term notes payable due within one year Used to borrow cash or purchase asset Accrue interest Date Dec1 Account and explanation Inventory Debit 30 000 Credit Dec 31 Purchased note payable by issuing a 3 month 9 note Interest expense 225 Note payable short term Interest payable Accrued interest on note payable 30 000 x 9 x 1 12 Sales tax payable Levied on retail sales Collected from customers and remitted Cash 105 000 d Sale 100 000 c Sale tax payable 5 000 c Accrued liabilities Results from expenses incurred but not yet paid Categories Salaries and wages Interest payable Income tax payable Payroll liabilities Major expense of most companies Salary wage commission Unearned revenues Current portion of long term debt Longer term debt often paid in installments Amount of principal payable within one year Company reclassifies amount from long term to current Estimated amounts Contingent Liabilities Potential liability that depends on future outcome from past event Accrue loss probable amount estimable Disclosure Loss reasonably possible A current Liability must be paid out of Cash Purchasing merchandise inventory on account results in a liability Bonds Payable Debts of issuing company Bond certificate states Company name principal maturity date interest rate interest payment dates Types of Bonds Term Serial Secured Unsecured Bond Prices Quotes as percent of maturity value Premium Prices above face Credit Balance Market Price decreases toward maturity value At maturity date Face value Market Value Interest Rates and Bond prices Bonds always sold at market price Bond s PV Stated interest rate coupon rate differs from market value Printed in bond Determines cash interest paid to bondholders Market interest rate effective interest rate Demanded by investors for loaning money Interest Payment Face Value x Stated interest rate X 1 2 Interest expense Carrying amount x market interest rate x 1 2 Amortization discount or premium of interest payments Interest Expense interest payment amortization Retiring Bonds before Maturity Can relieve high interest payments can borrow at a lower interest rate Callable feature issuer can pay off bonds at a prearranged prices results in loss or gain Convertible Bonds and Notes Bondholders can exchange bonds for stock Investors benefit from Guaranteed receipt of principal and interest on bonds Potential for gains on stock Leases Operating Lessee has right to us the asset Lessor retains risk and rewards of owing Lessee records rent expense Capital Lessee has right to use the asset Lessee assumes risk and rewards of ownership Lessee capitalizes the leased asset and records as a long term liability Capital Criteria Transfer of title at end of lease Bargain purchase option Lease term 75 of useful life Present value of lease payments 90 of fair value of asset Pensions and Postretirement Liabilities Expense recorded while employees work for the company Cash contributed into pension plan assets Obligation grows for future payments to employees Underfunded Plan assets less than obligation Overfunded Plan assets greater than obligation Corporate Characteristics Advantages separate legal