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1、Chapter 9 Bonds and Long-Term Notes,Bonds,Medium-and large-sized company often choose to borrow cash by issuing bonds.A bond issue divides a large liability into many smaller liabilitiesBonds obligate the issuing company to repay a stated amount at a specified maturity date and periodic interest bet
2、ween the issue date and maturity.,Issue date,Maturity date,face amount + interest,Face amount stated rate,The bond indenture,A bond indenturedescribes the specific promises made to bondholdersThe bond indenture is held by a trustee (commercial bank 、other financial institution) Two participants: iss
3、uing company (issuer)/bondholder (investor)Debenture bond (无担保债券) Subordinated debenture(次级无担保债券) Mortgage bond（抵押债券） Callable bond（可赎回债券） Convertible bonds(可转换债券),Issuing the bond,Bonds can be issued in three ways:Issued at face value (price=face amount) Stated rate=Market rateIssued at a discount
4、(priceface amount) Stated rateMarket rateOther things being equal, the lower the perceived riskiness of the bonds, the higher the price those bonds will command,Recording bonds issuance,Bonds issued at face amountIllustration 9-1 P373On Jan. 1, 2011, issued the bond:Issuer: Dr. Cash 700,000 Cr. Bond
5、s payable 700,000Investor: Dr. Investment in bonds 700,000 Cr. Cash 700,000,Liability,Asset,Recording bonds issuance,Illustration 9-1 P373On June 30, 2011, paid the interest:First interest payment =700,00012%(6/12)=$42,000Issuer: Dr. Interest expense 42,000 Cr. Cash 42,000Investor: Dr. Cash 42,000 C
6、r. Investment revenue 42,000,Recording bonds issuance,Illustration 9-1 P373On Dec 31 2011, June 30 2012, Dec 31 2012 , June 30 2013 , make the same journal entry to record the interest payment.On Dec. 31, 2013, bonds were mature: Issuer: Dr. Interest expense 42,000 Cr. Cash 42,000 Dr. Bonds payable
7、700,000 Cr. Cash 700,000,Recording bonds issuance,Bonds issued at a discountThe issuing price? Price=PV of interest + PV of face amount Illustration 9-2 P375 PV of interest: Interest payment =$700,00012%(6/12)=$42,000 n=23=6 semiannual periods i=14%(6/12)=7% PV of interest=$42,0004.76654=$200,195,Re
8、cording bonds issuance,Illustration 9-2 P375 PV of face amount: Face amount=$700,000 n=23=6 semiannual periods i=14%(6/12)=7% PV=$700,0000.66634=$466,438 Price=$200,195+$466,438=$666,633,Recording bonds issuance,Illustration 9-2 P375 On Jan. 1, 2011, issued the bonds: Issuer: Dr. Cash 666,633 Discou
9、nt on bonds payable 33,367 Cr. Bonds payable 700,000 The difference between the effective interest and the interest paid increases the existing liability Effective interest=market rateoutstanding balance,Recording bonds issuance,Illustration 9-2 P375On June 30, 2011, paid the interest: Interest expe
10、nse =$666,63314%(6/12)=$46,664 Interest actually paid=Face amount Stated rate =$700,00012%(6/12)=$42,000 Dr. Interest expense 46,664 Cr. Cash 42,000 Discount on bonds payable 4,664 On Dec. 31, 2011the outstanding balance =$666,633+$4,664=671297,Recording bonds issuance,Illustration 9-2 P375 On Dec.
11、31, 2011, paid the interest: Interest expense =$671,29714%(6/12)=$46,991 Interest actually paid =$700,00012%(6/12)=$42,000 Dr. Interest expense 46,991 Cr. Cash 42,000 Discount on bonds payable 4,991,Recording bonds issuance,Illustration 9-2 P375 On June 30 2012, Dec. 31 2012, June 30 2013 , make the
12、 same journal entry to record the interest payments: On Dec. 31, 2013 bonds were mature: Interest expense =$693,45614%(6/12)=$48,544 Dr. Interest expense 48,544 Cr. Cash 42,000 Discount on bonds payable 6,544 Dr. Bonds payable 700,000 Cr. Cash 700,000,Recording bonds issuance,Bonds issued at a premi
13、um Issuing price: Price=PV of interest + PV of face amount Illustration 9-3 P378 PV of interest: Interest payment =$700,00012%(6/12)=$42,000 n=23=6 semiannual periods i=10%(6/12)=5% PV of interest=$42,0005.07569=$213,179,Recording bonds issuance,Illustration 9-3 P378 PV of face amount: Face amount=$
14、700,000 n=23=6 semiannual periods i=10%(6/12)=5% PV of face amount =$700,0000.74622=$522,354,Recording bonds issuance,Illustration 9-3 P378 Price of the bonds =PV of interest + PV of face amount =$213,179+$522,354=$735,533 On Jan. 1, 2011, issued the bonds: Dr. Cash 735,533 Cr. Bonds payable 700,000
15、 Premium on bonds payable 35,533,Recording bonds issuance,Illustration 9-3 P378 On June 30, 2011, paid the interest: Interest expense =$735,53310%(6/12)=$36,777 Interest actually paid =$700,00012%(6/12)=$42,000 Dr. Interest expense 36,777 Premium on bonds payable 5,223 Cr. Cash 42,000,Recording bond
16、s issuance,Illustration 9-3 P378 On June 30 2012, Dec. 312012, June 30 2013, make the same journal entry to record the interest payments: On Dec. 31, 2013, bonds were mature: Interest expense =$70667110%(6/12)=$35,329 Interest actually paid =$700,00012%(6/12)=$42,000 Dr. Interest expense 35,329 Prem
17、ium on bonds payable 6,671 Cr. Cash 42,000 Dr. Bonds payable 700,000 Cr. Cash 700,000,A zero-coupon bonds pay no interest. It offers a return in the form of a “deep discount”from the face amount The present value of $2,230,discounted at 2% for 20years,is $1,501 Graphic 9-5 P378,Zero-coupon bonds,Bet
18、ween interest dates,Any interest that has accrued since the last interest date must be recorded by an adjusting ebtry prior to preparing fincial statements Example P380 October 31 Dr. Interest expense $31,327 Cr. Discount on bonds $3,327 Interest payable $28,000,December 31 Dr. Interest expense $15,
19、664 Interest payable $28,000 Cr. Discount on bonds payable $1,664 Cash $42,000,Between interest dates,The straight-line method,A company is allowed to determine interest indirectly by allocating a discount or a premium equally to each period over the term to maturity Interest dates $33,3676=$5,561 per period Dr. Interest expense $47,561 Cr. Discount on bonds payable $5,561 Cash $42,000,
