22-1 1-1 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
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22-3 Secured or unsecured Registered or unregistered Single-maturity or serial-maturity Types of Bonds Name and define the various types of bonds Secured and Unsecured Secured: specific property pledged as collateral. Unsecured: backed only by a company’s general credit. Unsecured bonds are known as debentures Objective 1
Transcript of 22-1 1-1 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
22-11-1McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
22-2
Long-Term Bonds
Section 1: Financing Through Bonds
Chapter
22
Section Objectives
1. Name and define the various types of bonds.2. Explain the advantages and disadvantages of
using bonds as a method of financing.
22-3
Secured or unsecured Registered or unregistered Single-maturity or serial-maturity
Types of Bonds
Name and define the various types of bonds
Secured and Unsecured Secured: specific property pledged as
collateral. Unsecured: backed only by a company’s
general credit.
Unsecured bonds are known as debentures
Objective 1
22-4
Registered and Unregistered Registered: issued to a particular purchaser
listed in the corporation’s records. Unregistered (coupon): transferred by delivery;
coupons attached for each interest payment.
Single-Maturity and Serial-Maturity Single-maturity: Bonds mature on the same day. Serial-maturity: Bonds are payable over a
period of years.
Types of Bonds
22-5
The market interest rate is the interest rate a corporation is willing to pay and investors are willing to accept at the current time. The face interest rate refers to the contractual interest rate specified on the bond.
Interest Rates
22-6
Capital Stock Bonds PayablePermanent CapitalNo debt to repay.
Debt Must be repaid.
Advantages and Disadvantages of Using Bonds as a Method of Financing
Explain the advantages and disadvantages of using bondsas a method of financingObjective 2
22-7
Capital Stock Bonds PayableStockholders’ EquityCommon stock has no legal
requirement for dividends. Preferred stock requirements depend on contract.
Dividends are not deductible for income tax purposes.
Long-term liabilities Interest must be paid on
the bonds. Interest is a deductible
expense.
Advantages and Disadvantages of Using Bonds as a Method of Financing
22-8
Capital Stock Bonds Payable Preference dividends on
preferred stock are usually slightly higher than interest rates on bonds because there is more risk associated with preferred stock.
Interest rates on bonds are usually slightly lower than dividends on preferred stock.
Advantages and Disadvantages of Using Bonds as a Method of Financing
22-9
Long-Term Bonds
Section 2: Bond Issue and Interest
Chapter
22
Section Objectives3. Record the issuance of bonds.4. Record the payment of interest on bonds.5. Record the accrual of interest on bonds.6. Compute and record the periodic amortization of a
bond premium.7. Compute and record the periodic amortization of a
bond discount.
22-10
On April 1, 2013, Charbo Corporation sells $50,000 ($1,000 x 50) of its 10-year bonds at face value for cash
Bonds Issued at Face Value
2013
Apr. 1 Cash 50,000.00 10% Bonds Payable, 2023 50,000.00
Issued bonds at face value
Record the issuance of bondsObjective 3
22-11
Payment of InterestOn October 1, 2013, the interest for six months at 10 percent becomes due on the $50,000 of bonds issued.
($50,000 X 10% X 6/12 = $2,500)
2013
Oct. 1 Bond Interest Expense 2,500.00 Cash 2,500.00 Paid semiannual bond
interest
Record the payment of interest on bondsObjective 4
22-12
The issuing corporation must write off, or amortize, the premium over the period from date of issue of the bonds until date of maturity.
If the face rate on the bonds exceeds the market rate of interest at the time the bonds are issued, the bonds will be issued at a premium.
Amortizing the premium reduces the interest expense over the period the bonds are outstanding.
Bond Premium
22-13
Bonds Issued at a Discount
2016
Apr. 1 Cash 48,880.00Discount on Bonds Payable 1,120.00 10% Bonds Payable, 2023 50,000.00 Issue bonds at 97.76
Compute and record the periodic amortization of a bond discountObjective 7
22-14
Carrying Value of Bonds
Formula Bonds Payable
+ Premium on Bonds
– Discount on Bonds
Carrying Value
Carrying value is also known as book value
22-15
Long-Term Bonds
Section 3: Bond Retirement
Chapter
22
Section Objectives
8. Record the transactions of a bond sinking fund investment.
9. Record an increase or decrease in retained earnings appropriated for bond retirement.
10. Record retirement of bonds payable.
22-16
The bond contract might require that retained earnings are appropriated while the bonds are outstanding
Retained Earnings Appropriated for Bond Retirement
Record an increase or decrease in retained earnings appropriated for bond retirement
Objective 9
22-17
Corporation could have surplus cash, so bonds are retired early. Interest rate decreases could result in an early retirement of bonds.
Early Retirement of Bonds
22-18
QUESTION:
What is the total book value to be removed?
$49,040
$50,000 face value 960 discount book valueFace value – discount
REMINDER: Gain or loss is the difference between book value of bonds retired and what is paid for them
ANSWER:
