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Bonds and Long-Term Notes

Bonds and Long-Term Notes. Sid Glandon, DBA, CPA Assistant Professor of Accounting. Long-Term Debt. Bonds payable Long-term notes payable Mortgages payable Pension liabilities Lease liabilities. Bonds Payable. Bond indenture Promise to pay principle amount at maturity date

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Bonds and Long-Term Notes

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  1. Bonds and Long-Term Notes Sid Glandon, DBA, CPA Assistant Professor of Accounting

  2. Long-Term Debt • Bonds payable • Long-term notes payable • Mortgages payable • Pension liabilities • Lease liabilities

  3. Bonds Payable • Bond indenture • Promise to pay principle amount at maturity date • Promise to pay periodic interest at stated rate on face (maturity) value

  4. Valuation of Bonds Payable • Present value of • Principle discounted at market rate • Interest (ordinary annuity) discounted at market rate • Sold at a premium • Market rate of interest < Stated rate • Sold at a discount • Market rate of interest > Stated rate

  5. Bonds Issued at a Discount

  6. Bonds Issued at a Premium

  7. Amortization of Premium or Discount • Amortization of premium • Reduces interest expense • Amortization of discount • Increases interest expense

  8. Buyer pays seller for accrued interest up to the date of purchase Purchaser receives full interest payment on the interest payment date Bonds Issued between Interest Dates

  9. Example: Bonds Issued between Interest Dates

  10. Effective Interest Method • Bond interest expense • Multiply carrying value of bonds times effective interest rate • Bond interest paid • Multiply face amount of bonds times stated interest rate • Amortization of premium or discount • Subtract interest paid from interest expense

  11. Bond Issue Price

  12. Journal Entry to Record Issue

  13. Amortization Schedule

  14. To Record Interest Expense in 2001 and Interest Payment in 2002

  15. Bond Issue Costs • Record as deferred charge (asset) • “Unamortized Bond issue costs” • Amortize over the life of the bonds • Use of straight-line method is ok

  16. Extinguishment of Debt • Before maturity date of bonds • Amortization must be brought current • Discount • Premium • Unamortized bond issue costs • Gain or loss is classified as separate line item, part of ordinary income

  17. Long-Term Notes Payable • Valued as the present value of • Future principle payments, and • Future interest payments • Premium or discount is amortized over life of loan

  18. Types of Long-Term Notes • Interest-Bearing Notes • Issued at par • Issued at less than market rate • Zero-Interest-Bearing Notes • Calculate discount • Amortize discount as interest expense for each period over the life of the loan

  19. Zero-Interest-Bearing Note

  20. Journal Entry

  21. Amortization Schedule

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