자료 유출에 유의하시기 바라며, 본 내용의 유포, 판매 및 무단전재 시

저작권법 위반으로 불이익을 받으실 수 있습니다. –kt innoedu–

Present value / Bonds

Topic Basic concepts of Time value of money

1. Time value of money를 이해한다
2. Future value
학습내용
3. Present value
4. Annuity 현금흐름

The difference between the present value of cash flows and their future value represents the
time value of money. Interest is the rent paid for the use of money over time.

1. Future value vs. Present value

1) Future value : The amount that would accumulate at a future point.
2) Present value : Today’s equivalent to a particular amount in the future.

of a single amount
Future value Ordinary annuity (= annuity in arrears)
of annuity
Annuity due (= annuity in advance)

of a single amount
Present value Ordinary annuity (= annuity in arrears)
of annuity
Annuity due (= annuity in advance)

1
 3) Future value of a single amount : FV = PV x (1 + i)n

Present 1 년 후 FV=X 2 년 후 FV=X n 년 후 FV=X

$100 (i=10%) 100+100x0.1 100(1+0.1)+100(1+0.1)x0.1 100(1+i)n

Compounding = 100(1+0.1) = 100(1+0.1)(1+0.1)
annually = 100(1+0.1)2

cf) Interest compounding semiannually? 1 년 후 FV = 100(1+0.05)2

(1) Simple interest vs. Compound interest

a. Simple interest : Interest accumulates for the principal only.
b. Compound interest : Interest accumulates for both the principal and the
accumulated interests in previous periods.

Future Value (Amount) of $1

n/i 4% 6% 8% 10% 12%
1 1.0400 1.0600 1.0800 1.1000 1.1200
2 1.0816 1.1236 1.1664 1.2100 1.2544
3 1.1249 1.1910 1.2597 1.3310 1.4049
4 1.1699 1.2625 1.3605 1.4641 1.5735
5 1.2167 1.3382 1.4693 1.6105 1.7623
6 1.2653 1.4185 1.5869 1.7716 1.9738
7 1.3159 1.5036 1.7138 1.9487 2.2107
8 1.3686 1.5938 1.8509 2.1436 2.4760

2
 4) Present value of a single amount : PV = FV / (1+i)n

Present=X 1 년 후 FV=100 2 년 후 FV=100 n 년 후 FV=100

X (i=10%) 100 = X + X x 0.1 100=X(1+0.1)+X(1+0.1)x0.1 X = 100/(1+i)n

Compounding 100 = X (1+0.1) 100= X(1+0.1)(1+0.1)
annually X = 100/(1+0.1) 100= X(1+0.1)2
X = 100/(1+0.1)2
cf) Interest compounding semiannually? 1 년 후 100 의 PV = 100 / (1+0.05)2

Present Value of $1
n/i 4% 6% 8% 10% 12%
1 0.9615 0.9434 0.9259 0.9091 0.8929
2 0.9246 0.8900 0.8573 0.8264 0.7972
3 0.8890 0.8396 0.7938 0.7513 0.7118
4 0.8548 0.7921 0.7350 0.6830 0.6355
5 0.8219 0.7473 0.6806 0.6209 0.5674
6 0.7903 0.7050 0.6302 0.5645 0.5066
7 0.7599 0.6651 0.5835 0.5132 0.4524
8 0.7307 0.6274 0.5403 0.4665 0.4039

3
5) Ordinary annuity vs. Annuity due

(i=compounding interest, n=compounding periods)

Ordinary annuity a a a a
present future

Annuity due a a a a

(1) Future value of Ordinary annuity

 a(1+i)3 + a(1+i)2 + a(1+i) + a
ex) $100 deposited at the end of each year.
What is the future value in 5 years at annual interest of 10% ?
i) Compounding annually : i = 10%, n= 5
ii) Compounding semiannually : i = 5%, n = 10

Future Value (Amount) of an Ordinary Annuity

(annuity in arrears – end of period payments)
n/i 4% 6% 8% 10% 12%
1 1.0000 1.0000 1.0000 1.0000 1.0000
2 2.0400 2.0600 2.0800 2.1000 2.1200
3 3.1216 3.1836 3.2464 3.3100 3.3744
4 4.2465 4.3746 4.5061 4.6410 4.7793
5 5.4163 5.6371 5.8666 6.1051 6.3529
6 6.6330 6.9753 7.3359 7.7156 8.1152
7 7.8983 8.3938 8.9228 9.4872 10.0890
8 9.2142 9.8975 10.6366 11.4359 12.2997

4
(2) Present value of Ordinary annuity
 a / (1+i) + a / (1+i)2 + a / (1+i)3 + a / (1+i)4

Present Value of an Ordinary Annuity

(annuity in arrears – end of period payments)
n/i 4% 6% 8% 10% 12%
1 0.9615 0.9434 0.9259 0.9091 0.8929
2 1.8861 1.8334 1.7833 1.7355 1.6901
3 2.7751 2.6730 2.5771 2.4869 2.4018
4 3.6299 3.4651 3.3121 3.1699 3.0374
5 4.4518 4.2124 3.9927 3.7908 3.6048
6 5.2421 4.9173 4.6229 4.3553 4.1114
7 6.0021 5.5824 5.2064 4.8684 4.5638
8 6.7328 6.2098 5.7466 5.3349 4.9676

(3) Future value of Annuity due

 a(1+i)4 + a(1+i)3 + a(1+i)2 + a(1+i)

Future Value (Amount) of an Annuity Due

(annuity in advance – beginning of period payments)
n/i 4% 6% 8% 10% 12%
1 1.0400 1.0600 1.0800 1.1000 1.1200
2 2.1216 2.1836 2.2464 2.3100 2.3744
3 3.2465 3.3746 3.5061 3.6410 3.7793
4 4.4163 4.6371 4.8666 5.1051 5.3529
5 5.6330 5.9753 6.3359 6.7156 7.1152
6 6.8983 7.3938 7.9228 8.4872 9.0890
7 8.2142 8.8975 9.6366 10.4359 11.2997
8 9.5828 10.4913 11.4876 12.5795 13.7757

5
 (4) Present value of Annuity due
 a + a / (1+i) + a / (1+i)2 + a / (1+i)3

Present Value of an Annuity Due

(annuity in advance – beginning of period payments)
n/i 4% 6% 8% 10% 12%
1 1.0000 1.0000 1.0000 1.0000 1.0000
2 1.9615 1.9434 1.9259 1.9091 1.8929
3 2.8861 2.8334 2.7833 2.7355 2.6901
4 3.7751 3.6730 3.5771 3.4869 3.4018
5 4.6299 4.4651 4.3121 4.1699 4.0374
6 5.4518 5.2124 4.9927 4.7908 4.6048
7 6.2421 5.9173 5.6229 5.3553 5.1114
8 7.0021 6.5824 6.2064 5.8684 5.5638

6) Conversion of Annuity due to Ordinary annuity

(1) Ordinary annuity factor x (1+i) = Annuity due factor
ex) {a / (1+i) + a / (1+i)2 + a / (1+i)3 + a / (1+i)4} x (1+i)
= a + a / (1+i) + a / (1+i)2 + a / (1+i)3
(2) Ordinary annuity factor (n-1) + 1 = Annuity due factor

1. Time value of money에 따른 보상이 Interest 이다.

2. Interest 에는 Compound 개념과 Simple interest 개념이 있다.
학습정리
3. 일정한 간격을 두고 연속되는 현금흐름이 Annuity 현금흐름이다.
4. Annuity 흐름에는 Ordinary annuity 와 Annuity in due가 있다.

6
Topic Accounting application using present value technique
1. Present value를 Accounting measurement 시 사용하는 것을 이해한다.
2. Present value 로써 자산/부채의 값을 측정하는데 있어서의
학습내용
목적을 이해한다.
3. 예제를 통해 미래 현금흐름의 타입에 따른 적용방법을 이해한다.

1) The objective of using present value in accounting measurement is to estimate

fair value.
2) Valuation of long-term assets and liabilities such as bonds, notes, leases, pension
obligations and postretirement benefit other than pensions.

Example 1>
Cyber Co. sold a building to Sogang, Inc. on January 1, 20X1 with a cost of
$1,000,000 and a book value of $600,000 for a $500,000 note, which matures in 5
years and pays 5% interests annually. Neither the building sold by Cyber nor the
note received did not have a market value on that date and the incremental
borrowing rate of Sogang was 8%.

- Note -
Face (Maturity) amount : $500,000
Stated interest rate : 5% Market interest
Interest paid annually rate applied : 8%
Maturity : 01/01/20X1 ~ 12/31/20X5

7
Future
Cash 01/01 12/31 12/31 12/31 12/31 12/31
Flows /20X1 /20 X1 /20 X2 /20 X3 /20 X4 /20 X5
from Note
Ordinary $0 25,000 25,000 25,000 25,000 25,000
annuity
Single 500,000
amount
Compounding interest : 8%, Compounding periods : 5
PV of N/R = PV of ordinary annuity(25,000) + PV of a single amount(500,000)
On 01/01/20 X1 : PV of N/R = 25,000 x 3.9927 + 500,000 x 0.6806 = 440,117

Date Journal entries

Cyber:
Dr. Note Receivable 500,000 Cr. Building 1,000,000
01/ 01/ X1 A.D. 400,000 Discount on NR 59,883
Loss on Disposal 159,883
Sogang, Inc.:
Dr. Building 440,117 Cr. Note payable 500,000
01/ 01/ X1 Discount on NP 59,883

8
 Example 2>
On 01/01/20X1, Cyber Co. purchased inventory from Sogang, by giving a
noninterest bearing promissory note due in 3 years. Fair value of inventory is
unknown and Cyber would have to pay interest at 10% in a normal borrowing.

- Note –
Face amount : $300,000 Market interest
Stated interest rate : N/A rate applied : 10%
Maturity : 01/01/20 X1 ~ 12/31/20 X3

Future Cash Flows 01/01 12/31 12/31 12/31

from Note /20X1 /20X1 /20X2 /20X3
Single amount 300,000
Compounding interest : 10%, Compounding periods : 3
PV of N/P = PV of a single amount(300,000)
On 01/01/20X1 : PV of N/P = 300,000 x 0.7513 = 225,390

Date Journal entries

Cyber:
Dr. Inventory 225,390 Cr. N/P 300,000
01/ 01/ X1
Discount on N/P 74,610
Sogang, Inc.:
Dr. N/R 300,000 Cr. Sales 225,390
01/ 01/ X1 Discount on NR 74,610

9
 1. 미래현금 흐름의 현재가치를 측정하는데 있어서 Discount 이자율은 Market
(Effective) interest rate을 사용하는 것이 GAAP 이다.
학습정리
2. 자산/부채의 측정 시 Fair value 가 없다면 그 자산/부채로부터 있을
미래현금 흐름이 현재가치로 Fair value를 대신할 수 있다.

10
 Topic Bonds overview and types
1. Bonds의 전반적인 이해 및 발행 타입을 이해한다.
학습내용 2. Discount 발행과 Premium 발행의 개요
3. Bond의 issue price 결정과정을 이해한다.

- Bond is a form of interest bearing notes payable.

- A bond issue divides a large liability into many smaller liabilities
- Issuing corporation has obligation to pay investors a specific sum of money at a
designated maturity date plus periodic interest payments based on a percentage of
the face amount of the bond.

1. Common Types of Bonds

1) Unsecured bonds : Debenture bonds
2) Secured bonds Mortgage bonds : Secured by real property
Collateral trust bonds : Secured by personal property
Commodity backed-bonds : Secured by commodity
Sinking fund bonds : Secured by bond sinking fund
3) Term bonds : Bonds mature at a single specified future date
4) Serial bonds : Bonds mature in installments
5) Registered bonds : Bonds issued in the name of the owner
6) Coupon (Bearer) bonds : Bonds not registered
cf) Zero coupon bonds (deep discount bonds) : Bonds with no stated interest
7) Convertible bonds : Bonds that can be converted into common stock at the
bondholder’s option
8) Callable bonds : Bonds that the issuing company can retire at a stated dollar
amount prior to maturity

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2. Issuance of Bonds

- When a bond is issued, the price is computed as the sum of the present value of the
future principal payment plus the present value of the future periodic interest
payments.
- Issuance price is equal to the maturity value and periodic interests discounted to PV
= PV of interest payment at ordinary annuity + PV of a face value at maturity

a. Issued at Face value : Stated interest rate = Market interest rate at issuance
b. Issued at a Discount : Stated interest rate < Market interest rate at issuance
c. Issued at a Premium : Stated interest rate > Market interest rate at issuance

3. Determining the Selling Price

1) Issuing Bonds at a Discount

example> Assume that on January 1, 20X1, Cyber Company issued $500,000 of

12% bonds, dated January 1, 20X1, maturing in 3 years. Interest is payable
semiannually on June 30 and December 31. The market yield for bonds of similar
risk and maturity is 14%.

Bond
Face amount : $500,000
Sated interest : 12% Market interest at the date
(01/01/20X1 ~12/31/20X3) of issuance : 14%
Semiannually on June 30 &
December 31

12
 (1) Future Cash Flows from Bond
Future 01/01 06/30 12/31 06/30 12/31 06/30 12/31
Cash Flows /20X1 /20X1 /20X1 /20X2 /20X2 /20X3 /20X3
from Bond
Ordinary 0 30,000 30,000 30,000 30,000 30,000 30,000
annuity
Single 500,000
amount
Compounding interest : 7%, Compounding periods : 6
PV of a single amount at 7% for 6 periods : 0.6663
PV of ordinary annuity at 7% for 6 periods : 4.7665
PV of Bond at issuance = PV of ordinary annuity + PV of a single amount
Proceeds from issuance = 30,000 x 4.7665 + 500,000 x 0.6663 = $476,145

Date Journal entries

Dr. Cash 476,145 Cr. B/P 500,000
01/ 01/X1
Discount 23,855

13
 1. Bonds는 원금의 회수방식 및 발행조건 등에 따라 여러 Type이 있다.
2. 발행되는 Bonds의 지급이자율과 그 Bonds의 발행 시 적용되는 시장이자율
(유효이자율)과의 관계에 따라 Par 발행, Discount 발행, Premium 발행
학습정리 등으로 나뉜다.
3. Bonds의 지급이자율이 Market 이자율보다 낮은 경우의 발행을 Discount
발행이라 한다.

14
 Topic Bond - discount issuance
1. Discount 발행을 이해한다.
학습내용 2. Discount 발행 시 이자비용의 인식 및 discount amortization을 이해한다.
3. Discount 발행 시 Financial statement에 미치는 영향을 이해한다.

(2) Amortization Schedule : Effective interest method

Amortization Present
Cash Interest Unamortized
Date interest exp. discount value of
of discount Bond
01/ 01/X1 0 0 0 23,855 476,145
06/30/ X1 30,000 33,330 3,330 20,525 479,475
12/31/ X1 30,000 33,563 3,563 16,962 483,038
06/30/ X2 30,000 33,813 3,813 13,149 486,851
12/31/ X2 30,000 34,080 4,080 9,069 490,931
06/30/ X3 30,000 34,365 4,365 4,704 495,296
12/31/ X3 30,000 34,704 4,704 0 500,000
- Bond 의 Carrying amount 는 Discount 가 Amortized 된 만큼 증가하므로
Discount 가 모두 Amortized 되는 Maturity date 에는 Bond 의 Carrying amount 는
Maturity value (Face value)인 $500,000 이 됨
- Interest expense 는 매년 증가함 (why? 증가하는 Bond 의 Carrying amount 에 일
정한 이자율인 Effective interest rate 을 곱하여 인식하므로)

15
 (3) Recording Issuance of Bond and Interest Payments
Date Journal entries
Dr. Cash 476,145 Cr. B/P 500,000
01/ 01/X1
Discount 23,855
Dr. Interest expense 33,330 Cr. Cash 30,000
06/30/ X1 Discount 3,330
Dr. Interest expense 33,563 Cr. Cash 30,000
12/31/ X1
Discount 3,563
Dr. Interest expense 33,813 Cr. Cash 30,000
06/30/ X2
Discount 3,813
Dr. Interest expense 34,080 Cr. Cash 30,000
12/31/ X2
Discount 4,080
Dr. Interest expense 34,365 Cr. Cash 30,000
06/30/ X3
Discount 4,365
Dr. Interest expense 34,704 Cr. Cash 30,000
12/31/ X3 Discount 4,704
Dr. B/P 500,000 Cr. Cash 500,000

cf) Amortization using Straight –line method

Cash Interest Amortization Unamortized Present value

Date interest exp. of discount discount of Bond
01/ 01/X1 0 0 0 23,855 476,145
06/30/ X1 30,000 33,976 3,976 19,879 480,121
12/31/ X1 30,000 33,976 3,976 15,903 484,097
06/30/ X2 30,000 33,976 3,976 11,927 488,073
12/31/ X2 30,000 33,976 3,976 7,951 492,049
06/30/ X3 30,000 33,976 3,976 3,975 496,025
12/31/ X3 30,000 33,975 3,975 0 500,000
- 매년 상각하는 Discount의 금액을 일정하게 하는 방법임
- 상각되는 Discount 금액이 일정하고 Cash로 나가는 이자금액이 일정하므로 매년 인식
되는 Interest expense도 일정함. 그러나 어쨌든 Discount가 상각되는 만큼은 Bond의
Carrying amount가 증가하는데 비해 그와 관련된 Capital cost인 이자비용이 매년 일
정하게 인식됨으로 인해 이자의 비율(즉, 이자율)은 점점 Decrease 하는 것으로 반영됨.
따라서 Non-GAAP 임.

16
 (4) Balance Sheet Presentation
Long-term liabilities :
Bond Payable at face value xxx
Less : Unamortized Discount (xxx)
xxx
Less: Current Portion (xxx)
Long-term bonds Outstanding xxx

1. Bonds는 원금의 회수방식 및 발행조건 등에 따라 여러 Type이 있다.

2. 발행되는 Bonds의 지급이자율과 그 Bonds의 발행 시 적용되는 시장이자율
(유효이자율)과의 관계에 따라 Par 발행, Discount 발행, Premium 발행
등으로 나뉜다.
학습정리
3. Bonds의 지급이자율이 Market 이자율보다 낮은 경우의 발행을 Discount
발행이라 한다.
4. Discount 발행 시의 Amortization table 작성 및 이자비용의 인식은
Effective interest rate에 따라야 한다. (GAAP)

17
 Topic Bond - premium issuance and FS presentation
1. Premium 발행을 이해한다.
학습내용 2. 발행 타입에 따라 Financial statement에 미치는 영향을 이해한다.
3. 이자지급 기일 사이에 발행된 Bonds에 대한 회계처리를 이해한다.

2) Issuing Bonds at a Premium

example> Assume that on January 1, 20X1, Cyber Company issued $500,000 of

12% bonds, dated January 1 maturing in 3 years. Interest is payable semiannually
on June 30 and December 31. The market yield for bonds of similar risk and
maturity is 10%.

Bond
Face amount : $500,000
Sated interest : 12% Market interest at the date
(01/01/20X1 ~12/31/20X3) of issuance : 10%
Semiannually on June 30
& December 31

(1) Future Cash Flows from Bond

Future 01/01 06/30 12/31 06/30 12/31 06/30 12/31
Cash Flows /20X1 /20X1 /20X1 /20X2 /20X2 /20X3 /20X3
from Bond
Ordinary 0 30,000 30,000 30,000 30,000 30,000 30,000
annuity
Single 500,000
amount
Compounding interest : 5%, Compounding periods : 6
PV of a single amount at 5% for 6 periods : 0.7462
PV of ordinary annuity at 5% for 6 periods : 5.0757
PV of Bond at issuance = PV of ordinary annuity + PV of a single amount
Proceeds from issuance = 30,000 x 5.0757 + 500,000 x 0.7462 = $525,371

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 (2) Amortization Schedule : Effective interest method
Present
Cash Interest Amortization Unamortized
Date value of
interest exp. of premium premium
Bond
01/ 01/X1 0 0 0 25,371 525,371
06/30/ X1 30,000 26,268 3,732 21,639 521,639
12/31/ X1 30,000 26,082 3,918 17,721 517,721
06/30/ X2 30,000 25,886 4,114 13,607 513,607
12/31/ X2 30,000 25,680 4,320 9,287 509,287
06/30/ X3 30,000 25,464 4,536 4,751 504,751
12/31/ X3 30,000 25,249 4,751 0 500,000
- Bond 의 Carrying amount 는 Premium 이 Amortized 된 만큼 감소하므로
Premium 이 모두 Amortized 되는 Maturity date 에는 Bond 의 Carrying amount
는 Maturity value (Face value)인 $500,000 이 됨
- Interest expense 는 매년 감소함 (why? 감소하는 Bond 의 Carrying amount 에 일
정한 이자율인 Effective interest rate 을 곱하여 인식하므로)

(3) Recording Issuance of Bond and Interest Payments

Date Journal entries
Dr. Cash 525,371 Cr. B/P 500,000
01/ 01/X1
Premium 25,371
Dr. Interest expense 26,268 Cr. Cash 30,000
06/30/ X1
Premium 3,732
Dr. Interest expense 26,082 Cr. Cash 30,000
12/31/ X1
Premium 3,918
Dr. Interest expense 25,886 Cr. Cash 30,000
06/30/ X2
Premium 4,114
Dr. Interest expense 25,680 Cr. Cash 30,000
12/31/ X2
Premium 4,320
Dr. Interest expense 25,464 Cr. Cash 30,000
06/30/ X3
Premium 4,536
Dr. Interest expense 25,249 Cr. Cash 30,000
12/31/ X3 Premium 4,751
Dr. B/P 500,000 Cr. Cash 500,000

19
 (4) Balance Sheet Presentation

Long-term liabilities :
Bond Payable at face value xxx
Plus : Unamortized Premium xxx
xxx
Less: Current Portion (xxx)
Long-term bonds Outstanding xxx

Comparison of Effective interest and Straight-line amortization methods

Effective interest Straight-line Carrying
Total Interest Total Interest Value of
Amortization Amortization
Expense Expense Bond
Issued at a
Increasing Decreasing Constant Constant Decreasing
Premium
Issued at a
Increasing Increasing Constant Constant Increasing
Discount

Carrying amount of Bond payable on the Balance Sheet

At issue At maturity
$525,371

Premium

Face amount :
$500,000

Discount
Carrying amount at Straight-line

Carrying amount at Effective interest

$476,145

20
 3) Issuing Bonds between Interest dates
Bonds are usually sold between interest dates. The amount of interest that has
accrued since the last interest payment is added to the price of the bond.

example> Assume that on April 1, 20X1, Cyber Company issued $500,000 of 12%
bonds at 102 plus accrued interests, which was dated January 1, 20X1 and matures
in 3 years. Interest is payable semiannually on June 30 and December 31. Cyber
uses straight-line method to amortize the premium on bond payable. (immaterial)

- Proceeds from issuance of bond : 500,000 x 102% = 510,000 (premium 발행)

- Interest accrued : 500,000 x 6% x 3/6 = 15,000
- Premium amortized using straight line method : 10,000 / 33 months = 303/month

(1) Recording Issuance of Bond with Accrued Interest and Interest Payments
Date Journal entries
Dr. Cash 525,000 Cr. B/P 500,000
04/01/20X1 Premium 10,000
Int. payable 15,000
Dr. Int. payable 15,000
06/30/20X1 Interest expense 14,091(plug) Cr. Cash 30,000
Premium 909
Dr. Interest expense 28,182 Cr. Cash 30,000
12/31/20X1
Premium 1,818
Dr. Interest expense 28,182 Cr. Cash 30,000
06/30/20X2
Premium 1,818
Dr. Interest expense 28,182 Cr. Cash 30,000
12/31/20X2
Premium 1,818
Dr. Interest expense 28,182 Cr. Cash 30,000
06/30/20X3
Premium 1,818
Dr. Interest expense 28,181 Cr. Cash 30,000
12/31/20X3 Premium 1,819
Dr. B/P 500,000 Cr. Cash 500,000

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 1. Premium 발행 시에도 인식하는 이자비용 및 Premium 의 Amortization은
Effective interest rate을 적용한다.
2. Straight line으로 이자비용 및 Discount/Premium을 상각하는 경우에는
Effective interest rate 을 적용하는 경우와 다른 영향을 미침을 이해할 수
있다.
3. Bonds의 Maturity 시점의 Bonds 의 Carrying amount는 Bonds의 발행 시
학습정리
Discount 발행되었건 Premium으로 발행되었건 상관없이 모두Face amount
로 같다.
4. Bonds가 이자지급일 사이에 발행될 때는 Bonds의 발행가에 경과 이자분을
합하여 받은 후 이자지급 시에는 Bond holder가 언제 Bonds를 취득하였나
와 상관없이 Bonds에서 제시된 이자를 지급한다.

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Topic Convertible bond & bonds with detachable warrants
1. Convertible bonds의 발행 및 Conversion에 대한 회계처리를 이해한다.
2. Detachable 한 Stock warrant와 Bonds를 함께 발행하는 경우의
학습내용
회계처리를 이해한다.
3. Debt issue cost를 이해한다.

4) Issuing Convertible Bonds

- Convertible bonds have features of both debt(bond) and equity(stock)

- Because of the inseparability of their debt and equity features, the entire
issue price of convertible bonds is recorded as debt, as if they are
nonconvertible bonds.
(ex) Cash proceeds > Face amount of Bond => Premium 발행
- The periodic reduction of premium/discount is exactly same as if these
were nonconvertible bonds.
- When the conversion option is exercised : Book value method
Market value method

(1) Book value method : The bonds are removed from the accounting records and
the new shares issued are recorded at the book value of the bonds. Therefore,
no gain or loss is recorded upon conversion.

Conversion> Dr. B/P (BV) xxx Cr. C/S xxx

APIC xxx (plug)

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(2) Market value method : A gain/loss equal to the difference between the
carrying amount of the bond at the date of the conversion and the fair value of
the shares issued upon conversion.
Conversion> Dr. B/P (BV) xxx Cr. C/S xxx
APIC xxx
Loss xxx Gain xxx

example> Bonds with a face amount of $100,000 and a carrying amount

of $108,000 are converted into 5,000 shares of $10 par value common
stock with a fair value of $30.

a. Conversion recorded under the Book value method

Dr. Bond payable 100,000 Cr. Common stock 50,000
Premium on B/P 8,000 APIC 58,000(plug)

b. Conversion recorded under the Market value method

Dr. Bond payable 100,000 Cr. Common stock 50,000
Premium on B/P 8,000 APIC 100,000*
Loss 42,000(plug)
*
5,000 shares x ($30 fair value - $10 par value)

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5) Issuing Bonds with Detachable Warrants
- Warrants are option contracts which give the right to buy stock at a fixed
price within a specific time period.
- Because they are detachable, the warrants are traded separately and
considered to be a separate financial instrument.
- The proceeds of debt issued with detachable stock purchase warrants to be
allocated between the debt and stock warrants based on the relative market
value at date of issuance and the warrants is accounted for as APIC.
(Proportional method)
- If the fair value of one security is not determinable, the proceeds are
allocated based on the fair value of the other security. (Incremental method)

example> On January 1, 20X1, five hundred $1,000, 8% bonds maturing

in 10 years were sold at 102 with one detachable stock purchase warrant
attached to each bond. Each warrant entitles the holder to purchase one share
of $10 par common stock at $100 per share. The fair value of the bonds without
the stock warrants was 98 and the fair value of the warrants was $80 per warrant.
All the stock warrants were exercised on October 1, 20X1.
- Cash proceeds = $500,000 Face amount x 102% = $510,000
- Allocation of proceeds

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 Proportional method
Bond Warrants
$490,000 $40,000
$510,000 x $510,000 x
$490,000*+$40,000** $490,000+$40,000

= $471,510 = $38,490
* Face amount $500,000 x 98%
** 500 stock warrants x $80

- Recording of Issuance on 01/01/20X1

Dr. Cash 510,000 Cr. Bond payable 500,000
Discount 28,490 APIC-Warrants 38,490

- Recording of Warrants Exercised on 10/01/20X1

Dr. Cash 50,000* Cr. Common stock 5,000**
APIC-Warrants 38,490 APIC 83,490(plug)
* 500 Stock warrants x $100
** 500 shares x $10 par value

cf) Incremental method

(Assume that the fair value of stock warrants is not determinable)

Bond Warrants
FV of Bond without warrants : at 98 $510,000 cash proceeds - $490,000

$500,000 Face amount x 98% = $490,000 = $20,000

- Recording of Issuance on 01/01/20X1

Dr. Cash 510,000 Cr. Bond payable 500,000
Discount 10,000 APIC-Warrants 20,000

- Recording of Warrants Exercised on 10/01/20X1

Dr. Cash 50,000 Cr. Common stock 5,000
APIC-Warrants 20,000 APIC 65,000(plug)

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 1. Convertible bonds를 발행시에는 일반적인 Bonds를 발행할 때와 같이 회계
처리한다.
2. Conversion을 회계처리하는 방법에는 Book value method와 Market value
method가 있다.
학습정리
3. Detachable한 Stock warrant와 Bonds를 함께 발행하는 경우에는 발행 시부
터 Bonds 의 발행가와 Stock warrant의 발행가를 구분하여 회계처리한다.
4. Stock warrant 의 발행가는 APIC-Stock warrant로 인식한다.

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 Topic Extinguishment of Bonds and other bond issues
1. 만기 이전에 Bonds를 상환하는 경우의 회계처리를 이해한다.
학습내용 2. Bond의 disclosure requirement를 이해한다.
3. Covenant compliance에 대해 이해한다.

4. Extinguishment of Debt
- A liability is considered extinguished if either one of following
conditions is met.
a. The debtor pays the creditor and is relieved of all its obligation for the
liability. (Payment of debt)
b. The debtor is legally released from being the primary obligor under the
liability, either judicially or by the creditor. (Legal release)

1) Extinguishment of debt at maturity : No gain/ loss

2) Early extinguishment of debt

- All gains or losses resulting from the extinguishment of debt should be
recognized in the period of extinguishment
- The carrying amount of unamortized discount or premium must be adjusted
as of the date of debt extinguishment.

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 Example> On January 1, 20X1, Cyber Company had issued five hundred
$1,000 bond of 8%, due in 10 years, at 102. The premium had been amortized
using the straight-line method.
On January 1, 20X6, Cyber repurchased all the outstanding bonds in the open
market at 98.

- Issued at a Premium on January 1, 20X1

Dr. Cash 510,000 Cr. Bond payable 500,000
Premium 10,000

- Early extinguished on January 1, 20X6

Dr. Bond payable 500,000 Cr. Cash 490,000
Premium 5,000* Gain 15,000

* $10,000 – ($10,000 ÷ 10 years x 5 years)

cf) Refunding(차환) : Achieving the extinguishment of old debt by the use of

proceeds from issuing new debt. (Replacement of old debt
with new debt)

Dr. Old debt (BV) xxx Cr. New debt xxx

Loss (plug) or Gain (plug)

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5. Debt Issue Costs (Bond Issue Costs)
- Costs incurred in connection with issuing bonds or notes
- Legal fees, accounting fees, printing costs, registration fees, underwriting
fees
- Report in the balance sheet as a direct deduction from that debt liability and
amortize using the effective interest method to interest expense, same as
discount/premium treatment (thereby increasing effective interest rate)

6. Disclosure Requirements for Long-term Obligation

- ASC 470 requires disclosure at the balance sheet date of future payments for
sinking fund requirements and maturity amounts of long-term debt during
each of the next five years following the date of the latest balance sheet
presented.
- The combined aggregate amount of maturities & sinking fund requirements
for all LT borrowings should be disclosed

example>
Sinking fund requirements Maturities
20X1 $100,000 -
20X2 100,000 150,000
20X3 150,000 200,000
20X4 150,000 250,000
20X5 200,000 300,000
$700,000 $900,000

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7. Bond Sinking Fund
- A bond sinking fund is trusteed fund where an amount of money is
contributed each year so that there is a sum available to repay the debt at the
end of the term.
- Classification : Noncurrent asset
- Change in balance of Bond sinking fund :

Beg. balance xxx Withdraw to repay the bonds xxx

Deposits xxx Expense from operating fund xxx
Interest earned xxx
Dividends received xxx

Ending balance xxx

8. Debt Covenant Compliance

Positive covenants
Specify what the borrower must do and include such requirements as
a) provide audited financial statements each year
b) maintain certain minimum financial ratios
(current ratio, working capital, interest coverage ratio, debt to equity ratio, total debt)
c) maintain life insurance on key employees
Negative covenants

Specify actions the borrower cannot take, such as restrictions on

a) the sale of certain assets
b) the incurrence of additional debt
c) the payment of dividends
d) the compensation of top management

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 1. 만기 이전에 Bonds를 상환하는 경우에는 상환 시점의 Bonds의 Carrying
amount 및 관련자산 (Debt issue cost)의 Book value와 상환 시 대가의 차
이에 따라 상환에 따른 Gain 또는 Loss 가 인식된다.
2. Debt issue cost는 premium/discount와 같은 방식으로 유효이자율법에 의
해 상각하여 interest expense로 인식한다. BS에 역시 bond 액면가액에서
학습정리
차감하는 방식으로 보고한다.
3. 향후 5년동안의 maturities & bond sinking fund는 required disclosure 사항
이다.
4. Bond sinking fund는 restricted cash로 noncurrent asset에 주로 표시된다.

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