BONDS PAYABLE

1. BONDS PAYABLE • ARE AN OBLIGATION TO PAY A FIXED AMOUNT OF INTEREST AND PRINCIPLE FOR A FIXED PERIOD OF TIME

2. BONDS PRESENTED ON BALANCE SHEET • IF PAYMENT IS DUE MORE THAN ONE YEAR FROM NOW OBLIGATION IS PRESENTED ON THE BALANCE SHEET UNDER LONG TERM OBLIGATIONS AT NET PRESENT VALUE • IF PAYMENT IS DUE WITHIN ONE YEAR FROM NOW OBLIGATION IS PRESENTED ON THE BALANCE SHEET UNDER CURRENT LIABILITIES AT NET PRESENT VALUE. (CURRENT PORTION OF LONG TERM DEBT)

3. JOURNAL ENTRIES NEEDED • ACQUIRE DEBT • MAKE CASH INTEREST PAYMENTS • ADJUST PREMIUM OR DISCOUNT AT END OF PERIOD • DISPOSE OF DEBT

4. TWO INTEREST RATES • BOND INTEREST RATE – INTEREST RATE AT WHICH THE BORROWER AGREES TO PAY OVER THE LIFE OF THE BOND. (PRINTED ON THE FACE OF THE BOND) • MARKET INTEREST RATE – INTEREST RATE PREVAILING IN THE MARKET AT THE TIME THE BOND IS ISSUED

5. PREMIUM AND DISCOUNT • PREMIUM - IF THE BOND RATE IS HIGHER THAT THE MARKET RATE AT THE TIME OF ISSUANCE THE BOND IS ISSUED AT A PREMIUM • DISCOUNT – IF THE BOND RATE IS LOWER THAN THE MARKET RATE AT TIME OF ISSUANCE THE BOND IS ISSUED AT A DISCOUNT

6. CASH INTEREST PAYMENT DATES • CASH INTEREST IS PAID ON BONDS EITHER ANNUALLY, SEMIANNUALLY, QUARTERLY OR EVEN MONTHLY • BUT BONDS ARE ISSUED ON ALL DATES OF THE YEAR • REGARDLESS WHEN ISSUED THE BORROWER PAYS THE INTERESTS FOR THE ENTIRE PAST PERIOD • SINCE THE BORROWER DOES NOT OWE THE INTEREST FOR THE ENTIRE PAST PERIOD THE AMOUNT NOW OWED OF THE TOTAL INTEREST PAYMENT IS PAID BY THE LENDER TO THE BORROWER

7. TO BORROW THE MONEY • CASH XXX • DISCOUNT XXX (MKT RATE HIGHER) • INTEREST EXPENSE XXX • BONDS PAYABLE XXX

8. CASH IS DEBITED AT BORROWING • CASH IS DEBITED FOR THE TOTAL AMOUNT RECEIVED AT THE TIME OF BORROWING. • CASH IS DEBITED FOR THE SUM OF TWO NUMBERS • CASH = NET PRESENT VALUE OF THE BOND + INTEREST TO BE PAID BUT NOT OWED AT THE FIRST INTEREST PAYMENT

9. PRESENT VALUE CALCULATIONS • MUST KNOW HOW TO DO PRESENT VALUE CALCULATIONS TO WORK BOND PROBLEMS

10. DISCOUNT IS DEBITED • DISCOUNT IS DEBITED AS A PLUG FIGURE IN THIS JOURNAL ENTRY. • PREMIUM IS CREDITED AS A PLUG FIGURE IF THE BOND RATE IS HIGHER THEN THE MARKET RATE AT THE TIME OF ISSUANCE

11. INTEREST EXPENSE IS CREDITED • INTEREST EXPENSE IS CREDITED FOR THE AMOUNT OF INTEREST NOT OWED ON THE FIRST CASH INTEREST PAYMENT

12. BONDS PAYABLE IS CREDITED • BONDS PAYABLE IS CREDITED FOR THE FACE OF THE BOND. THIS IS THE AMOUNT TO BE PAID AT MATURITY.

13. CASH INTEREST PAYMENTS • INTEREST EXPENSE XXX • CASH XXX • INTEREST EXPENSE = P*R*T • = (PRINCIPLE)*(RATE)*(TIME)

14. TO ADJUST INTEREST AT END OF PERIOD • TWO JOURNAL ENTRIES NEEDED • INTEREST EXPENSE XXX (PRT) • INTEREST PAYABLE XXX • TO BRING ACTUAL INTEREST UP TO DATE • INTEREST EXPENSE XXX • DISCOUNT XXX • TO CONVERT DISCOUNT TO INTEREST EXPENSE

15. TWO METHODS OF AMORITIZING DISCOUNT • STRAIGHT LINE = ORIGINAL DISCOUNT*PART OF YEAR ALL DIVIDED BY USEFUL LIFE • INTEREST METHOD = NET BONDS*MKT INTEREST RATE*PART OF YEAR

16. AMORTIZATION CHART HEADINGS • DATE INTEREST EXPENSE CASH (cont headings) AMORTIZATION NET BONDS PAYABLE

17. TO PAY OFF BONDS • STEP ONE BRING INTEREST EXPENSE UP TO DATE WITH JOURNAL ENTRIES (BOTH CASH INTEREST OWED AND AMORTIZATION OF DISCOUNT)

18. BONDS PAYABLE DISPOSAL (cont) • THE T ACCOUNT BONDS PAYABLE IS CLEANED OUT TO ZERO • THE T ACOUNT DISCOUNT IS CLEANED OUT TO ZERO • AMOUNT OF CASH PAID IS GIVEN (AGREED UPON) • LOSS ON EARLY EXTINGUISHMENT OF DEBT IS A PLUG FIGURE

19. GOOD LUCK!