Bonds and Long-Term Notes

1
Bonds and Long-Term Notes

• Sid Glandon, DBA, CPA
• Assistant Professor of Accounting

2
Long-Term Debt

• Bonds payable
• Long-term notes payable
• Mortgages payable
• Pension liabilities
• Lease liabilities

3
Bonds Payable

• Bond indenture
• Promise to pay principle amount at maturity date
• Promise to pay periodic interest at stated rate
  on face (maturity) value

4
Valuation of Bonds Payable

• Present value of
• Principle discounted at market rate
• Interest (ordinary annuity) discounted at market
  rate
• Sold at a premium
• Market rate of interest lt Stated rate
• Sold at a discount
• Market rate of interest gt Stated rate

5
Bonds Issued at a Discount
6
Bonds Issued at a Premium
7
Amortization of Premium or Discount

• Amortization of premium
• Reduces interest expense
• Amortization of discount
• Increases interest expense

8
Bonds Issued between Interest Dates

• Buyer pays seller for accrued interest up to the
  date of purchase
• Purchaser receives full interest payment on the
  interest payment date

9
Example Bonds Issued between Interest Dates
10
Effective Interest Method

• Bond interest expense
• Multiply carrying value of bonds times effective
  interest rate
• Bond interest paid
• Multiply face amount of bonds times stated
  interest rate
• Amortization of premium or discount
• Subtract interest paid from interest expense

11
Bond Issue Price
12
Journal Entry to Record Issue
13
Amortization Schedule
14
Bond Issue Costs

• Record as deferred charge (asset)
• Unamortized Bond issue costs
• Amortize over the life of the bonds
• Use of straight-line method is ok

15
Journal Entry for January 1, 2002 Interest Payment
16
Extinguishment of Debt

• Before maturity date of bonds
• Amortization must be brought current
• Discount
• Premium
• Unamortized bond issue costs
• Gain or loss is classified as separate line item,
  part of ordinary income

17
Long-Term Notes Payable

• Valued as the present value of
• Future principle payments, and
• Future interest payments
• Premium or discount is amortized over life of
  loan

18
Types of Long-Term Notes

• Interest-Bearing Notes
• Issued at par
• Issued at less than market rate
• Zero-Interest-Bearing Notes
• Calculate discount
• Amortize discount as interest expense for each
  period over the life of the loan

19
Zero-Interest-Bearing Note
20
Journal Entry
21
Amortization Schedule