Chapter 12 Bond loan when you buy a bond you are lending that entity money for a specified amount of time and when it ends you get back the principal plus the interest there is a market to bonds unlike private loans and the price for a bond can fluctuate at any given time but the face value stays the same and the stated interest rate also called coupon rate or contract rate what changes over time is the risk level of the bond market interest rate or effective interest rate the higher the risk the higher the yield when a bond is issued you pay the price face value the issuer promises to pay you back on a specific day maturity date at a pre determined interest rate contract rate or coupon rate earnings per share is often considered when deciding between bonds and stocks types of bonds secured bonds bond that s backed by collateral unsecured debenture bonds bonds issued on the basis of the general credit of the corporation term bonds when all bonds of an issue mature at the same time serial bonds if the bond matures over several dates registered bonds a bond whose owner is recorded and can be transferred to another owner bearer or coupon bonds detachable coupons that must be presented to the issuer for interest payments convertible bonds bonds that can be exchanged for other securities such as common stock callable bonds corporations reserve the right to redeem before their maturity bond indenture is an underlying contract between the company issuing bonds and the bondholders interest payments usually made semiannually If market rate is than contract rate sold at a discount If market rate contract rate sold at face amount If market rate contract rate sold at a premium Issuing Bonds at Par Ex Issued 100 000 five year 7 bonds at par interest is paid semiannually on June 30 and December 31 Cash 100 000 Bonds Payable 100 000 Interest Payments Ex Issued 100 000 five year 7 bonds at par interest is payable semiannually on June 30 and December 31 Record the journal entry for the first interest payment Interest Expense 3500 100 00x7 x1 2 Cash 3500 Issuing Bonds for a Discount Ex Issued 100 000 five year 8 bonds for 93 75 of par value interest is paid semi annually on June 30 and December 31 Cash Discount on bonds payable 6250 account 93750 100 00x93 75 Bonds Payable 100 000 Contra liability Bonds Payable discount on bonds payable carrying book value of bonds payable Amortizing a Bond Discount Ex Interest is paid semiannually on June 30 and December 31 of preceding example assuming straight line amortization record the journal entry Interest Expense 4625 Discount on bonds payable 6250 10 periods 625 Cash interest paid per period 4000 100000x8 x1 2 Issuing Bonds at a Premium Ex Issued 100 000 5 year 6 bonds for 107 55 of face value Cash 107550 Bonds Payable Premium on Bonds Payable 100 000 7550 Bonds payable premium on bonds payable carrying value of bonds payable Amortizing a bond premium Ex Prior problem interest is paid semiannually on June 30 and December 31 assuming straight line amortization Interest Expense Premium on Bonds Payable Cash 2245 755 3 000 Bond Redemption A gain price paid for redemption is below bond carrying amount amount A loss price paid for redemption is above the bond carrying Gain on Redemption of Bonds Ex Has 200 000 4 bonds outstanding now selling for 95 On Jan 1 the bonds have a carrying value of 197 000 If the company decides to purchase these bonds and retire them what journal entry is needed Bonds Payable 200 000 Discount on Bonds Payable Cash Gain on Redemption of Bonds 7 000 3000 200 000 197 000 190 000 200 000x95 Loss on Redemption of Bonds Ex Issued 200 000 4 bonds outstanding which are callable at 110 On January 1 bonds have a carrying value of 207 000 Bonds Payable Premium on Bonds Payable Loss on Redemption of Bonds 13 000 200 000 7 000 Cash 220 000 Installment Notes Ex Braves Company borrows 100 000 cash signing a 5 year 7 installment note requiring annual payments of 24 390 on Dec 31 of each year Journal entries Jan 1 and Dec 31 Cash 100 000 Notes Payable 100 000 Interest Expense Notes Payable 7000 100 000x7 17390 Cash 24390 Amortization of Installment Notes Ex Braves Company borrows 100 000 cash from a bank signs a 5 year 7 installment note requiring annual payments of 24 390 on Dec 31 of each year Record two years installment Interest Expense Notes Payable Cash 7 000 17 390 24 390 Interest Expense 5783 100 000 17390 x7 Notes Payable Cash 18607 24390 Principal payments increase each year while interest expense decreases each year Number of times interest charges are earned Income before Income tax Interest Expense Interest Expense
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