Serial Bond
- Matures in Installments
Term Bond
- Matures on a Single Date
Debenture Bond
- Unsecured
Sinking Fund Bonds
- Cash Held for Bond Repayment
- 5 years of Disclosures
Bond Proceeds Formula
- Present Value of the Principal Payment at Maturity
+ Present Value of Interest Payments made
= Market Value of Bond Proceeds
Present Value of a Bond formula
Step 1. PV of $1 @Yield Rate (not Stated Rate)
x Bond Face Value
PLUS
Step 2. PV of an Ord. Annuity of $1 for Term @Yield
x (Stated Rate x Face)
Present Value of a Bond Example
Face Amount: $1,000
Stated Interest Rate: 6%
Yield interest rate 9%
Bond Term: 10 periods
PV $1 for 10 periods @ 6% = .558
PV $1 for 10 periods @ 9% = .422
PV of an OA of $1 @ 9% for 10 periods = 6.418
- *IGNORE STATE Rate until step 2
Step 1: $1,000 x .422= $422
Step 2: $1,000 x 6% = $60(Ony time state rate)
$60 x 6.418= $385
Carrying amount of bond= $422 + $385= $807
Third Part Debt Issuance Costs
- Engraving
- printing
- legal
- underwriting
- registration
Bond Issuance Costs Reduces:
- Carrying Amount of Liability
- KEY: INCREASES EFFECTIVE INTEREST RATE
Bond Issuance Costs Disclosures:
- Same as a Change in Accounting Principle
Bond Issuance costs uses what treatment?
- Retrospective Treatment to all prior periods presented in the financial statements
Bonds Classifed as Trading Securities are Reported:
- at FMV with unrealized gains and losses being included in earnings
Bond Amortization Interest Method
- Both discount and premium amortization amounts increase each year
Bond to Stocks: Book Value Method
- No gain or loss recognized
- APIC is the plug for the difference . between the Bond’s Book Value and the Par Value of the CS
Bond to Stock: Book Value Method Journal entry
Bond Payable 1,000,000
Bond Premium 300,000
Common Stock (Par) 50,000
APIC (plug) 1,250,000
Stated Rate
- Rate on the face of the bond
Market Rate
- Rate that bonds are currently sellling for
If Martket Rate > Stated Rate?
- Bond will need to sell at a discount for buyers to be interested
- difference in market rate vs stated is made up by the buyer purchasing the bond for lesss than par value
- Market Rate: 12%
- Stated Rate: 10%
- Par Value: $100
- Purchase Price: $98
If Market Rate < Stated Rate?
- Bond will need to sell at Premium
- difference in market rate vs stated is made up by the buyer purchasing the bond for more than par value
- Market Rate: 8%
- Stated Rate: 10%
- Par Value: $100
- Purchase Price: $102
Bond Issuance ON interest Date entry
- Dr. Cash 102
- Cr. Premium . 2
- Cr. Bond Payable 100
- Dr. Cash 98
- Dr. Discount 2
- Cr. Bond Payable 100
Bond issuance BETWEEN interest date
- Dr. Cash 102 Dr. Cash 98
- Dr. Cash Interest* Dr. Cash Interest*
- Cr. Premium 2 Dr. Discount 2
- Cr. Bond Payable 100 Cr. Bond Payable 100
- Cr. Interest Payable Cr. Interest Payable *
* Face x Stated Rate x Interest Accrued since last date
If a company issues bonds BETWEEN interest dates, then the total cash that they recieve will be
- MORE than they normally would (set asied any considerations for premium or discount, they are irrelevant at this point
Purchaser of the bonds must give the bond issuer the amount of accrued interest up front. Why?
- Because if the bonds are issued on March 1, and the next interest payment date is July 1, then when the buyer of the bonds gets the full interest payment on July 1, it will be for the full six months (Face x Stated Rate)
- buyer getting money wasnt earned in July, then the buyer essentially pays them back for those two months up front
Issues Bonds between interest date example:
$100,000 Bonds
10% Stated Rate
Sold at Par on March 1
January 1 & July 1 interest dates
100,000 x 2/12 x 10% = $1,667
Cash $101,667
Bonds Payable $100,000
Interest Expense $1,667 (credit)
