Chapter 17 Part 2 Bonds Payable

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Chapter 17Part 2 Bonds Payable

• Bond Premiums

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Issuing Bonds at a Premium

• Premium on Bonds Payable is an account used when
  bonds are issued at a value greater than 100 of
  par.
• It is an adjunct (also called accretion)
  liability account which is added to the par value
  of the bonds to produce the carrying (or book)
  value of the bonds.

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Issuing Bonds at a Premium

• Both the face value of the bond and the premium
  are shown on the balance sheet presentation.
• The book value of the bonds at the date of issue
  is always equal to the cash price of the bonds.

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Issuing Bonds at a Premium

• Interest payments are calculated on the face
  value of the bond, not the cash received for
  them.
• Example
• On January 1, 2003, XYZ Corporation issues
  100,000 par value bonds for cash of 108,983,
  bearing interest of 6 for the bond term of five
  years. Interest is paid semi-annually.

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Issuing Bonds at a Premium
Entry

• Balance Sheet Presentation

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Amortizing Bond Premiums

• The bond premium calculated must be amortized
  over the life of the bond.
• Dont forget accrual if the interest period and
  accounting period do not coincide.
• Also accrue the amortization of the bond premium.

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Amortizing Bond Premiums

• There are two methods to amortize the premium
• Straight-Line Method
• Effective Interest Method

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Straight-Line Method

• The interest expense for each period is the same
  for each payment made throughout the life of the
  bond.
• The amortization of the premium is therefore the
  same.

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Straight-Line Method

• The total interest expense over the life of the
  bond needs to be determined in order to calculate
  the expense and amortization for each period.
• Interest expense from prior example is

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Straight-Line Method Amortization Table
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Effective Interest Method

• Interest expense decreases as the bond matures
  because it is based on the carrying value of the
  bond.
• The carrying value of the bond decreases as the
  premium is amortized.

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Effective Interest Method Amortization Table

• Assume market interest rate is 4

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Bond Premiums

• Questions?

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Assignment Hints

• Exercises
• 17-18 c) Ending Balance Dec 31/06 40,745
• 17-20 b) Carrying Value Oct 1/09 752,599
• 17-21 c) Bond Interest Expense 37,987
• 17-22 b) Carrying Value Oct 1/09 775,050
• 17-23 c) DR Premium on Bonds Payable 8,705

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Assignment Hints

• Problems
• 17-8A
• Ending Balance Dec. 31/07 80,730
• 17-10A
• 27,823
• Bond B Gain on retirement 14,918