Accounting for Bonds (II)

Learning Objectives:
1. Continue with Bond Issuance
 Proceeds, Premium/Discount, Issuance Cost
2. Continue with Interest Payments
 Interest Expense, Amort of Premium/Discount, Payment
3. Continue with Year-end Adjustment
 Interest Expense/Payable, Amort of Premium/Discount, Amort of
Issuance Cost
4. Continue with(Early) Retirement of Bond
 Calculate Carrying Value of Bonds  Gain/Loss
 Calculate Carrying Value of Issuance Costs  Add to Gain/Loss
 Interest Payment: Amortization of
Bond Premium & Discount
Bonds with Amortization Journal Entries
Par No Interest Expense xxxx
Cash xxxx
Interest Expense = yield% x Principal
Cash amount = coupon % x Principal

Premium Yes Interest Expense xxxx

Amortization (Reduce) Prem on BP xx
Premium on BP Cash xxxx
Interest Expense < Cash Interest Expense = yield % x Principal
Cash amount = coupon % x Principal

Discount Yes Interest Expense xxxx

Amortization (Reduce) Disc’t on BP xx
Discount on BP Bonds Payable xxxx
Interest Expense > Cash Interest Expense = yield % x Principal
Cash amount = coupon % x Principal
 Year-End Adjustment

1. Accrue All Interest Expense

2. Amortize the portion of
Premium/Discount
3. Record Interest Expense & Payable
4. Amortize Issuance Cost (Asset, if any)
 Interest Expense
 Bonds Retirement
Gain Loss
Clear Bond Payable, Prem/Disc’t on BP Clear Bond Payable, Prem/Disc’t on BP
Example: Example:
Bonds Payable $100,000 Bonds Payable $100,000
Prem on BP 1,000 Disc’t on BP (1,000)
Bonds Carrying Value $101,000 Bonds Carrying Value $ 99,000
Cash Paid $100,500 Cash Paid $100,500

Dr Cr Dr Cr
Bond 100,000 Bond 100,000
Prem on BP 1,000 Loss on Bonds Retirement 1,500
Gain on Bonds Retirement 500 Disc’t on BP 1,000
Cash 100,500 Cash 100,500
 Early Retirement of Debt
 Occasionally, the issuing company will call
(repay early) some or all of its bonds.

 Gains/losses are calculated by comparing the

bond call amount with the carrying amount
of the bond.

Carrying Amount > Retirement Price = Gain

Carrying Amount < Retirement Price = Loss
 Keu RATIO ANALYSIS

Times Interest Earned Ratio

Net earnings + Interest
Times Interest expense + Income tax expense
Earned =
Interest expense

The ratio shows the amount of resources

generated for each dollar of interest
expense. In general, a high ratio is
viewed more favourable than a low ratio.
 Next:
• Tutorial – Thurs: Midterm Review

• Midterm- Tues., Oct. 31

• Financial Statement Analysis