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Chapter 10 notes Vocab Bond Principle- amount payable at the maturity of the bond and on period cash interest payments are computed Per-Value- bond principle/maturity amount for a bond Face amount- bond principle/ maturity for a bond Stated rate- rate of cash interest per period states in bond contract Debenture- unsecured bond; no assets are specifically pledged to guarantee repayment Callable Bond- can be called for call retirement at option of user Convertible Bond- Can be converted into other securities (usually common stock) Indenture- Bond contract that specifies legal provisions of a bond issue Bond Certificate- bond document that each bondholder receives Trustee- independent party appointed to represent bondholders Coupon rate- state rate of interest on bonds Bond Premium- difference between selling price and par when bond is sold for MORE than par Bond Discount- difference between selling price and par when bond is sold for LESS than par Straight-line amortization- simplified method of amortizing a bond discount or premium that allocates an equal dollar amount to each interest period. Effective interest amortization- Method of amortization of a bond discount or premium on the basis of the effective interest amortization; it is the theoretically preferred method. M/C 1.c 2.c 3.b 4.d 5.c 6.b 7.c 8.c 9.a 10.c Mini’s M10–1) 1. Balance Sheet
- Income Statement
- Statement of Cash Flows
- May be in notes
- Not at all
- May be in notes
M10–2 )
Principal $600,000
Interest $ 24,000
Issue Price = $600,007* M10–3 ) Principal $900,000
Interest $ 27,000
Issue Price = $750, M10–4) January 1, 2011- Cash (+A) 940, Discount on Bonds Payable (+XL, -L) 60, Bonds Payable (+L) 1,000, June 30, 2011- Interest Expense (+E, -SE) ($940,000 11% 1/2) 51, Discount on Bonds Payable (-XL, +L) 1, Cash (-A) ($1,000,000 10% 1/2) 50, M10–5) January 1, 2011- Cash (+A) 580, Discount on Bonds Payable (+XL, -L) 20, Bonds Payable (+L) 600, June 30, 2011- Interest Expense (+E, -SE) 31, Discount on Bonds Payable (-XL, +L) 1, Cash (-A) 30, M10–6) Principal $500,000 0.4564 = $228,
real estate mortgage bonds and equipment trust bonds. Unsecured bonds are not supported by a mortgage or pledge of specific assets as a guarantee of payment at maturity date. Unsecured bonds usually are called debentures. 4) Callable bonds—bonds that may be called for early retirement at the option of the issuer. Convertible bonds—bonds that may be converted to other securities of the issuer (usually common stock) after a specified future date at the option of the bondholder. 7) At the date of issuance, bonds are recorded at their current cash equivalent amount; that is, the amount of cash received for the bonds when issued. The recording is in conformity with the cost principle. 9) The stated rate of interest is the rate specified on a bond, whereas the effective rate of interest is the market rate at which the bonds are selling currently. Must do Exercises E10–7. Computations: Interest: $100,000 x 6% x 1/2 = $3, Present value: $100,000 x 0.6756 = 67, $ 3,000 x 8.1109 = 24, Issue price = $91, E10–8. Computations: Interest: $750,000 x 8% = $ 60, Present value: $750,000 x 0.4224 = 316, $ 60,000 x 6.4177 = 385, Issue price = $701, Req. 1 January 1: Cash (+A).................................................................................................. 701, Discount on Bonds Payable (+XL, -L)........................................................ 48, Bonds Payable (+L)............................................................................... 750,
Req. 2 December 31: Interest Expense (+E, -SE)......................................................................... 64, Discount on Bonds Payable (-XL, +L)..................................................... 4, Cash (-A)............................................................................................... 60, Req. 3 December 31, 2011: Income statement: Interest expense (^) $ 64, Balance sheet: Long-term Liabilities Bonds payable $750, Less: Unamortized discount ($48,138 - $4,814)..... 43,324 $706, E10–9. Computations: Interest: $600,000 x 7.5% x 1/2 = $ 22, Present value: $600,000 x 0.7168 = 430, $ 22,500 x 6.6638 = 149, Issue price = $580, Req. 1 January 1: Cash (+A).................................................................................................. 580, Discount on Bonds Payable (+XL, -L)........................................................ 19, Bonds Payable (+L)............................................................................... 600, Req. 2 June 30: Interest Expense* (+E, -SE) ...................................................................... 24, Discount on Bonds Payable (-XL, +L)..................................................... 2, Cash (-A)............................................................................................... 22, *($580,016 x 8.5% x ½)
