Professional Documents
Culture Documents
Long-Term Liabilities
Bonds Payable
date(s)]
Term--single maturity date Serial--multiple maturity dates
Bonds Payable
Key terms
Par (principal/face value) of the bond Stated/face interest rate--determines periodic cash interest payments Market/effective interest rate--rate of return required by the market Maturity date and interest period
Bonds Payable
Bonds can be issued at:
par--face interest rate = market interest rate discount--face interest rate < market interest rate premium--face interest rate > market interest rate Amortization of premium or discount Straight line method Effective interest method
Straight-line Amortization
Not GAAP if it yields results which
are materially different from the effective interest method. Yields a constant dollar amount of interest even though the carrying value of the debt is changing.
200,000
Bonds Payable
7/1/14
200,000
Interest Expense 4,500 Cash 4,500 ($200,000 X 9% X 3/12) Quarterly interest 4,500
15,600
15,000 600
7/1/14
12/31/14 Interest Expense 29,700 Premium on Bond Payable 300 Interest Payable
30,000
Aumont Company
Exercise 14 - 10 Issuance of Bonds at a Premium--Effective Interest Method
Determination of Proceeds
Interest Paid: Par value X Face rate Interest Paid: $500,000 X 12% = $60,000 n=5 i = 10% (market)
Principal: $500,000 X .62092 = $ 310,460
Interest:
Cash
Premium--B/P Bond Payable
537,907
37,907 500,000
60,000
60,000
60,000
is a long-term asset The issue costs are amortized over the term (life) of the bonds
straight-line approach is generally used
Can not be expensed unless the
160,000
16,000
the next five years Restrictive debt covenants Collateral, if any Interest paid (3 years) Capitalized interest (3 years) Available sources of cash
Lines of credit Approved sale of debt securities
Convertible debt exchange for stock at the option of the investor at a predetermined rate
in the income statement in the period of the early extinguishment (redemption). Ordinary gain/loss = Reacquisition cost - Carrying value at the date of extinguishment (redemption)
Early Extinguishment: BE 11
Reacquisition cost: $500,000 X 99% = $495,000 Carrying Value: Bond Payable $500,000 Premium--BP 15,000 Unamort. Issue Cost (5,250) 509,750 Gain on Redemption $ 14,750 Bonds Payable 500,000 Premium on Bond Payable 15,000 Unamortized Issue Costs Cash Gain on Redemption of Bonds
December 31, 2014 Interest Expense 22,000 Discount on Note Payable ($200,000 X 11%)
22,000
(Equipment acquisition cost) n = 8 i = 11% 1. Principal ($250,000 X .43393) $ 108,482 2. Interest ($15,000 X 5.14612) 77,192 Present value of the note $ 185,674
Interest Paid: $250,000 X 6% = $15,000
January 1, 2014 Equipment 185,674 Discount on Note Payable 64,326 Notes Payable
250,000
End of Chapter 14