ACG 2021
Chapter 13
Bonds
Bonds – a form of interest bearing note.
-requires periodic interest payments and the face amount must be
repaid at the maturity date.
-bondholders are creditors of the issuing corporation.
Bond indenture – contract with bondholders
Principal – face value of each bond.
Term bonds – all bonds of an issue mature at the same time.
Serial bonds – maturities are spread over several dates.
Convertible bonds – exchanged for other securities
Callable bonds – a corporation reserves the right to redeem before their
maturity
Debenture bonds - bonds issued on the basis of general credit of the
corporation.
The Present-value concept and Bonds payable
When a corporation issues bonds, the price that buyers are willing to
pay for the bonds dependent upon the following three factors:
1. the face amount of the bonds, which is the amount due at the
maturity date
2. The periodic interest to be paid on the bonds
3. The market rate of interest
Coupon rate – rate of interest stated on the bonds
Market or effective rate – interest determined by market conditions.
Created by M. Mari
Fall, 2001
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ACG 2021
Chapter 13
If the Market rate = Coupon rate =  Bonds sells at face value
If the Market rate > Coupon rate  Bonds sell below face value
DISCOUNT
If the Market rate < Coupon rate  Bonds sell above face value
PREMIUM
Present Value of the Face Amount of Bonds
Value today of the amount to be received at a future maturity
date.
Example 1: $1,000 paid one year from today with the market
rate of interest being 10%.
Present Value of the Periodic Bond Interest Payments
Value today of the amount of interest to be received at the end
of each interest period.
Example 2: $1,000 paid two year from today with the market
rate and coupon rate of interest being 10%.
Accounting for Bonds Payable
Bonds Issued at Face Value
Market rate of interest = Coupon rate of interest
Cash
DR
Bond payable
Interest expense
Cash
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Fall, 2001
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CR
DR
CR
ACG 2021
Chapter 13
Bonds Issued at a Discount
Market rate of interest > Coupon rate of interest
Steps:
1. Compute the PV of the face amount
2. Compute the PV of the interest payments
3. Add the amounts in step 1 and 2, this is the selling price
of the bonds and the cash received.
4. Face amount – Selling price = discount
5. Entry:
Cash
DR
Discount on bonds DR
Bonds payable
CR
Example 3: Corporation sells $100,000 of 5 years bonds with a
coupon rate of interest of 12% and market rate of interest of 13%.
Interest of $6,000 is paid semiannually.
Example 4: Corporation sells $200,000 of 5 years bonds with a
coupon rate of interest of 10% and market rate of interest of 11%.
Interest of $10,000 is paid semiannually.
Created by M. Mari
Fall, 2001
Page 3 of 7
ACG 2021
Chapter 13
Amortizing a Bond Discount
There are two methods of amortizing a bond discount
1. straight line method
2. effective interest rate method
Straight line method:
Discount amortized = Discount / # of interest payments
Example 5: A corporation has a discount of $3594. The discount is
to be amortized over 10 periods. Record the payment of interest for
six months of $6,000 and the discount amortization.
Example 6: A corporation has a discount of $7800. The discount is
to be amortized over 10 periods. Record the payment of interest for
six months of $3,000 and the discount amortization.
Created by M. Mari
Fall, 2001
Page 4 of 7
ACG 2021
Chapter 13
Bonds Issued at Premium
Market rate of interest < Coupon rate
Steps:
Compute the PV of the face amount
Compute the PV of the interest payments
Add the amounts in step 1 and 2, this is the selling price of
the bonds and the cash received.
Face amount – Selling price = premium
Entry:
Cash
DR
Bonds payable
Premium
CR
CR
Example 3: Corporation sells $100,000 of 5 years bonds with a
coupon rate of interest of 12% and market rate of interest of 11%.
Interest of $6,000 is paid semiannually.
Example 4: Corporation sells $200,000 of 5 years bonds with a
coupon rate of interest of 11% and market rate of interest of 10%.
Interest of $11,000 is paid semiannually.
Created by M. Mari
Fall, 2001
Page 5 of 7
ACG 2021
Chapter 13
Amortized a Bond Premium
There are two methods of amortizing a bond discount
3. straight line method
4. effective interest rate method
Straight line method:
Premium amortized = Premium / # of interest payments
Example 5: A corporation has a premium of $3594. The premium is
to be amortized over 10 periods. Record the payment of interest for
six months of $6,000 and the amortization.
Example 6: A corporation has a premium of $7800. The premium is
to be amortized over 10 periods. Record the payment of interest for
six months of $3,000 and the amortization.
Homework: EX 13-8, 13-9, 13-11, 13-12, 13-13
Created by M. Mari
Fall, 2001
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ACG 2021
Chapter 13
Created by M. Mari
Fall, 2001
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