Chapter 15 - Bonds Payable and Investment in Bonds

Chapter 15- Bonds Payable and Investment in Bonds

Bond- is a form an interest bearing note, require periodic interest payments and face amount must be paid by maturity date.

Characteristics, Terminology and Pricing of Bonds Payable
Bond Indenture- also known as a trust indenture, is when a corporation issues bonds into a contract with bondholders.

Principal- is another term for the face value of abond, usually is in multiples of $1,000
*Bonds interest can be paid annually, semiannually or quaterly but most commonly paid semiannually.

Term Bonds- When all bonds of an issue mature at the same time
Serial Bonds- When bonds maturities are spread over several dates
Convertable Bonds- Bonds that can be exchanged for other securities, such as common stock
Callable Bonds- Bonds that a corporation reserves the right to redeem before their maturity date
Debenture Bonds- Bonds issued on the basis of the general credit of the corporation

Pricing of Bonds Payable

*When a corporation issues bonds, the price that buyers are willing to pay for the bonds depends upon the following three factors:
1. The face value of the bond after the maturity date
2. Period interest paid on the bond
3. Market rate interest of the bond

Contract Rate- Also known as coupon rate, is the rate of interest on a bond which is usually expressed as a percentage

Effective Rate of Interest- also known as the market rate of interest, this is determined by the transactions between buyers and sellers of similar bonds and also investors assessment of current and future economic conditions and expectations

Discount- When a bond is sold less than its face value, this results when a bond's market rate is higher than the contract rate.
*If the contract rate is equal to the market rate of interest then the bond will sell for it face value

Premium- If the contract rate is higher than the market rate of interest the bond will sell for higher than its face value

Present Value- Is the current value with accumulated interest. Original value plus interest

Future Value- The value of the bond in the future. The original value plus future interest

Present Value of the Periodic Bond Interest Payments

Annuity- The periodic value of a bond after interest periods. Series of equal cash payments at fixed intervals to bond.

Present Value of An Annuity- is the sum of the present values of each cash flow

Accounting for Bonds Payable

Bonds issued at face value in journal

-debit cash
-credit bonds payable also stating value of bond issued at face value

Calculating Interest in the journal

-debit Interest Expense
-credit Cash and state period of time interest was paid

Payment on a bond

-debit Bonds Payable
-credit Cash

Bonds Issued At a Discount

discount on bond in journal

-debit cash
-debit discount on bonds payable
-credit bonds payable

Amortizing a Bond Discount

*There are two methods if amortizing a bond discount, both amoortize the same total discount amount over the life of the bond
1. Straight Line Method
2. Effectivee Interest Rate Method, also called interest method

in journal

-debit Interest expense
-credit discount on bonds payable
-credit cash

Bonds issued at a premium

in journal

-debit cash
-cedit bonds payable
-credit premium on bonds payable

Amortizing a bond premium

in journal

-debit interest payable
-debit premium bonds payable
-credit cash

Zero Coupon Bonds

corporations issue bonds that provide for only the payments ofvthe face value at maturity date.

in journal

-debit cash
-decit discount on bonds payable
-credit bonds payable with note that was issued as zero coupon