Corporations and Bonds Payable
Chapter 21
21 - 1
Learning Objective 1
Journalizing the recording
of bondsas well as
interest payments.
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Learning Unit 21-1
Each bond certificate is usually issued in
denominations of $1,000.
 The face value is the amount to be repaid at
maturity date.
 The contract rate is the stated interest rate.
 A bond indenture is a written agreement.
 A trustee usually monitors bond activities.
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Learning Unit 21-1
Bonds are stated at a percentage of face value.
 Bonds are 100% if the bond rate and market
interest rate are equal.
 A bond discount occurs when the bond rate is
lower than market rate.
 Bonds are sold at a premium when the bond
rate is higher than market rate.
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Learning Unit 21-1
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What are some types of bonds?
secured bonds
debenture bonds
registered bonds
callable bonds
convertible bonds
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Learning Unit 21-1
Bond issuance requires interest to be paid.
 Interest expense reduces net income,
thereby reducing income tax.
 Issuing bonds is borrowing while issuing
shares of stock means less ownership for
existing shareholders (unless they buy the
new shares).
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21 - 6
Learning Unit 21-1
Interest on bonds must be paid each year.
 Dividend payments are optional.
 Bonds are a long-term liability.
 Interest is computed on a semi-annual basis.
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21 - 7
Learning Unit 21-1
Face value × Stated rate × 6/12 = Amount of
interest to be paid in cash each 6 months.
Face value × Market rate at issuance date × 6/12
= Amount to be debited to interest expense
every 6 months (effective method)
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Learning Unit 21-1
The above are equal if bonds were sold at
100%.
 If bonds were not sold at 100%, a bond
discount or bond premium exists.
 A discount or premium is amortized at the
interest payment date.
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21 - 9
Learning Objectives 2 and 3
Amortizing bond discounts
and bond premiums by the
straight-line method and by
the interest method.
Journalizing year-end adjusting
entries for bonds.
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Learning Unit 21-2
Straight-Line Method
The discount (or premium) is divided by the
number of interest periods for the bond issue
and provides the amount for amortization.
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Learning Unit 21-2
Amortization of a discount increases
interest expense.
 Amortization of a premium decreases
interest expense.
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Learning Unit 21-2
Bonds with a face value of $200,000 are sold at 97%.
The contract rate of interest is 12% (20 periods).
The market rate is 12.4%.
Cash
194,000
Discount on
Bonds Payable
6,000
Bonds Payable
200,000
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Learning Unit 21-2
Discount amortization = $6,000 ÷ 20 = $300
 How much is the interest payable at the end
of period one?
 $200,000 × 12% × 6/12 = $12,000
 How much is the interest expense?
 $300 (bond amortization) + $12,000 (interest
payable) = $12,300
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Learning Unit 21-2
Bonds with a face value of $200,000
are sold at 102%.
The contract rate of interest is 12%.
The market rate is 11.8%.
Cash
204,000
Bonds Payable
Premium on Bonds Payable
200,000
4,000
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Learning Unit 21-2
Cash payment is $12,000.
 4,000/20 = 200
 Premium amortization is $200.
 Interest expense is 12,000 – 200 = $11,800
 What is the journal entry at the end of
period one?
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Learning Unit 21-2
Interest Expense
Premium Bonds Payable
(amortization)
Cash
11,800
200
12,000
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Learning Unit 21-3
Interest Method
The interest method makes interest expense a
constant percentage of the bond carrying value.
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Learning Unit 21-3
Face value × Stated rate × 6/12 = Amount
of interest to be paid in cash each 6 months
 Carrying value × Market rate at issuance
date × 6/12 = Amount to be debited to
Interest Expense every 6 months
 The above are equal if bonds were sold at
100%.
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21 - 19
Learning Unit 21-3
Assume that Yang Corporation is issuing
$200,000 of 12%, ten-year bonds on April
1. Interest is to be paid on October 1 and
April 1.
 The selling price of the bonds is $178,808.
 The market rate is 14 %.
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21 - 20
Learning Unit 21-3
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What is the interest paid to bondholders at the end
of period one?
$200,000 × 12% × 6/12 = $12,000
What is the interest expense?
$178,808 × 14% × 6/12 = $12,517
What is the discount amortization?
$517
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Learning Unit 21-3
Interest Expense
12,517
Cash
Discount on Bonds Payable
(amortization)
12,000
517
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Learning Unit 21-3
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Assume that on December 31, three months
interest of $6,000 for the second period has
accrued. What is the adjusting entry?
Interest Expense
6,276.50
Discount on Bonds Payable
276.50
Bond interest payable
6,000.00
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Learning Objective 4
Journalizing entries related
to retirement of bonds
and to sinking funds.
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Learning Unit 21-4
Bonds are a long-term liability.
 Liabilities are paid at maturity (or early).
 Amortization must be brought up to date
and interest paid to bondholders.
 Maturity value (face value of bonds) is paid.
 Some issues require a sinking fund in which
cash is set aside to repay the bonds at
maturity date.
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Learning Unit 21-4
Assume that on June 30, a corporation
retired a $500,000, 10 % bond issue that
had an unamortized premium of $19,000.
 The bonds were called at 105.
 What is the journal entry?
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21 - 26
Learning Unit 21-4
Bonds Payable
Premium on Bonds Payable
Loss on Bond Retirement
Cash
Retirement of bond
500,000
19,000
6,000
525,000
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End of Chapter 21
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