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Long-Term Bonds

Chapter. 22. Long-Term Bonds. Section 3: Bond Retirement. Section Objectives. Record the transactions of a bond sinking fund investment. Record an increase or decrease in retained earnings appropriated for bond retirement. Record retirement of bonds payable. 2017 April 1.

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Long-Term Bonds

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  1. Chapter 22 Long-Term Bonds Section 3: Bond Retirement Section Objectives • Record the transactions of a bond sinking fund investment. • Record an increase or decrease in retained earnings appropriated for bond retirement. • Record retirement of bonds payable.

  2. 2017 April 1 Bonds Payable 150,000.00 New Partner Given Credit for Amount Invested Cash 150,000.00 Bond retired at maturity. When a bond matures, it is Retired. • The bond is paid. • The liability is removed from company’s balance sheet.

  3. Objective 8. Record The Transactions Of A Bond Sinking Fund Investment.

  4. QUESTION: What is a bond sinking fund investment? ANSWER: A bond sinking fund investment is a fund established to accumulate assets to pay off bonds when they mature.

  5. Bond Sinking Fund The cash put into the fund is invested. The net earnings of the fund will reduce the amount that the corporation will have to add each year after the first year.

  6. Bond Sinking Fund Investment Example: FLORAK decides to accumulate $30,000 per year in a bond sinking fund for each of the last five years the bonds are outstanding.

  7. 2012 April 1 Bond Sinking Fund Investment 30,000.00 New Partner Given Credit for Amount Invested Cash 30,000.00 Bond Sinking Fund Investment • Journal entry to record first annual installment: first annual installment of bond sinking fund

  8. 2013 April 1 Bond Sinking Fund Investment 1,760.00 New Partner Given Credit for Amount Invested Income from Sinking FundInvestment 1,760.00 Bond Sinking Fund Investment • Journal entry to record net income earned by sinking fund for the year: Net income earned by Sinking Fund during the year.

  9. 2013 April 1 Bond Sinking Fund Investment 28,240.00 New Partner Given Credit for Amount Invested Cash 28,240.00 ($30,000 first year installment less $1,760 first year income equals $28,240) Bond Sinking Fund Investment • Journal entry to record second annual installment: This procedure is repeated each year, until the entire amount needed to retire funds is reached.

  10. 2017 April 1 10% Bonds Payable, 2017 150,000.00 New Partner Given Credit for Amount Invested Bond Sinking Fund Investment 150,000.00 Bond Sinking Fund Investment • Journal entry to record retirementof bonds: Bonds retired at maturity using balance in sinking fund.

  11. Objective 9. Record An Increase Or Decrease In Retained Earnings Appropriated For Bond Retirement.

  12. Retained Earnings Appropriated for Bond Retirement • The bond contract might require that retained earnings are appropriated while the bonds are outstanding.

  13. 2012 April 1 Retained Earnings 30,000.00 New Partner Given Credit for Amount Invested Retained Earnings Appropriatedfor Bond Retirement 30,000.00 Retained EarningsAppropriated for Bond Retirement • FLORAK’S Board of Directors decides to appropriate $30,000 of retained earnings during each of the last five years the bonds are outstanding. • Record annual appropriation in years 2012- 2017: Appears on the balance sheet under the heading “Appropriated Retained Earnings.”

  14. 2017 April 1 Retained Earnings Appropriatedfor Bond Retirement 150,000.00 New Partner Given Credit for Amount Invested Retained Earnings 150,000.00 Retained Earnings Appropriated for Bond Retirement • In year that bond matures, record close-out of appropriation account: $30,000 x 5 years= $150,000

  15. Objective 10. Record Retirement Of Bonds Payable.

  16. Retirement of Bonds Recall that on April 1, 2010, FLORAK Corporation issued $50,000 face value, 10%, 10 year bonds at a discount. • Maturity date is January 1, 2017. • Interest is paid on January 1 and July 1 of each year. • Bonds were issued at 97.76. • Discount of $1,120 is amortized on a straight-line basis over the remaining 7 years until the bonds due date. • They decide to retire the bonds one year after issuance (April, 1, 2011).

  17. Early Retirement of Bonds • Corporation could have surplus cash, so bonds are retired early. • Interest rate decreases could result in an early retirement of bonds.

  18. QUESTION: $1,120 discount ÷ 84 months (remaining life of bond) How much discount is amortized in eachsix-month interest period? $ 13.333 per month X 6 months ANSWER: $ 80

  19. Retirement of Bonds On April 1, 2011, FLORAK Corporation purchased and retired $50,000 face value of the bonds (originally issued at a discount). • Represents 50% of total bonds outstanding. • Purchased at 101 plus accrued interest.

  20. What is the amount of unamortized discount that remains at time of retirement? Answer: Discount on Bonds Payable Beg. Bal 1,120 80 10/1/10 40 adj. entry 40 4/1/11 960 At time of retirement. . .

  21. What is the Carrying Value of the Bonds at Retirement? Bonds Payable Discount on Bonds Payable 50,000 1,120 80 10/1/10 40 adj 40 4/1/11 50,000 960 At time of retirement. . . Carrying Value of bonds = $49,040

  22. QUESTION: $50,000 face value 960 discount book value What is the total book value to be removed? ANSWER: $49,040 REMINDER: Gain or loss is the difference between book value of bonds retired and what is paid for them. Face value – discount

  23. $50,000 face value X 10% interest rate QUESTION: What is the interest up to the date of retirement? 5,000 X 3/12 period to retirement ANSWER: $ 1,250 Record bond interest expense up the date of retirement. . . Interest = principal X rate X time 2011 Apr 1 Bond Interest Expense 1,250 Bond Interest Payable 1,250 Cash 2,500

  24. $50,000 face value X1.01 purchase price QUESTION: What is the cash payment for repurchase price? $50,500 repurchase price ANSWER: $50,500 cash payment REMINDER: Gain or loss is the difference between book value of bonds retired and what is paid for them. Repurchase price = face value X 1.01

  25. QUESTION: $49,040 book value – 50,500 repurchase price What is the gain or loss on the transaction? $1,460loss on early retirement of bonds ANSWER: REMINDER: Gain or loss is the difference between book value of bonds retired and what is paid for them. Book value - repurchase price

  26. 2011 Apr. 1 Bonds Payable 50,000.00 Loss on Early Retirement of Bonds 1,460.00 Cash 50,500.00 Discount on Bonds Payable 960.00 Record Loss on Early Retirement

  27. R E V I E W SECTION Complete the following sentences: Bond retirement ______________ occurs when a bond is paid and the liability is removed from the balance sheet. bond sinking fund investment A __________________________ is a fund used to accumulate assets to pay off bonds when they mature. Net earnings of the bond sinking fund will ______ the amount the corporation will have to add each year after the first year. reduce

  28. R E V I E W SECTION Complete the following sentences: Bonds payable are usually retired at the ____________. maturity date Bonds may be retired early because a corporation has ____________. surplus cash interest rate Decreases in the ___________ could result in an early retirement of bonds.

  29. Thank You for using College Accounting, 11th Edition Price • Haddock • Brock

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