Statement Presentation

Issuing Bonds at a Discount

Issueband iii.ie

Candlestick AG
Statement of Financial Position (partial)

Non-current liabilities
Bonds payable €98,000
discounted
thanfacewine
lower

The issuing company must pay not only the contractual interest rate over the
term of the bonds but also the face value (rather than the issuance price) at
maturity.

Copyright ©2019 John Wiley & Sons, Inc.

20
Statement Presentation
Issuing Bonds at a Premium

Candlestick AG
Statement of Financial Position (partial)

Non-current liabilities
Bonds payable €102,000

The borrower is not required to pay the bond premium at the maturity
date of the bonds. Thus, the bond premium is considered to be a
reduction in the cost of borrowing.

issuant
Marang Copyright ©2019 John Wiley & Sons, Inc.
in 21
Ch 11 Part 2: Major Issues

1. Describe the major characteristics of bonds.

2. Explain how to account for bond transactions.
- Issuance

i
- Discount or premium amortization
- Redemption
3. Financial ratios
4. Discuss how non-current liabilities are reported and analyzed.

Copyright ©2019 John Wiley & Sons, Inc.

2
 Cash payment of interest ≠ Interest expense
Cash Interest Payment = Coupon Rate * Face Value Paidin

Bu t
Praetoriusmanatees 계약
coupon.aeme기엔 casr istofbmansimmetrae.io

Interest Expense = Market Rate * Carrying Value 巧 mamaratebad

interest
expense and
pasa
car.usmeanand
Carrying Value = Face Value + Premium (– Discount)bracelet
ua.com
premium
amore amountofminas.intdecrease

The Statement of Financial Position carrying value equals the balance in face value
(Bond Payable) plus the balance in the Premium or minus the balance in the
Discount.

This means that the Face Value never changes, but the Book Value changes over
the life of the bond.

3
 issuancedas
more rate
contractual

Subsequent Accounting for Par Bonds

1
앖앓
annual
semi 450
10.000 爬炸 450 to I to n Id i was
anarea payment
Suppose Chrysler has $10,000 in 9% bonds that mature in five years. Chrysler issued
rate
these bonds at par on January 1, 2000. The issuance entry is
coupon

Dr. Cash 10,000 Apriceoftre몚

i iiisname
Cr. Bond Payable 10,000

enshrining
Interest payments occur each January 1 and July 1. Chrysler records the first
semiannual interest payment as follows (all the other interest payments including the
last one on 1/1/2005 will be recorded in an identical way)
은 iratex
borrowing ommen안사동결과mamet
an
七
燃 Dr. Interest Expense 450 앉앴
옶샮
innarsituation
Cr. Cash paycashatone 450 too xi말
aanrate
At maturity, Chrysler will record payment of the bonds as follows:
remove baa
원금매매에pas
Dr. Bond Payableiannis 10,000
Cr. Cash 10,000

4
Subsequent Accounting for Bonds issued at a Discount

i
value
carrying faevalue as
come
less
borrow amount

Amortization of bond discount:msn.ieatscant

expense

Titian
• Allocated to expense in each period
• Increases amount of interest expense reported each period
• Amount of interest expense reported each period will exceed contractual
amount paid
• As discount is amortized, its balance declines
• Carrying value of bonds will increase, until at maturity carrying value of bonds
equals their face amount

Copyright ©2019 John Wiley & Sons, Inc.

5
 cashmere
www.t炷二 450
Suppose Chrysler has $10,000 in 9% bonds that mature in five years. Chrysler issued these
bonds on January 1, 2000, when the market rate is 10%. Interest payments occur each
January 1 and July 1.
amongwine even.me
When the bond is issued: Dr. Cash 9,613 毖谷son
amongamanabletoborrow
Cr. Bond Payable 9,613

Time
periods
When the coupon payment is disbursed at the end of Period 1:
tis Interest expense = 9,613 * 5% = 480
inpaymentCoupon payment=10,000 * 4.5% = 450
Discount amortization = 480 - 450 = 30 discountma
emmanearest
imammeㅠㅠ
value as
carrying x.ie
Dr. Interest Expense 네에 480 msn.in.fi iii
Cr. Cash 450 ismet Pant
Cr. Bond Payable 30
ramonediscount
decreasethediscount
antenna
Over life of bond, Carrying Value of bond moves toward Face Value.
Bandspasa.ie
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so
oritiiex.ee
cr
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6 vame .is
expense정해짐에
 discountb and has
discount been
bea적은
nasa 상태이래에 face
지급할 보다
value a
decrease
value介竹
among
able
pas 높여서미래에canpasbaa
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areaante discount
ese ascountiam
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armninefacecraneatmaturity
Subsequent Accounting for Bonds issued at a Premium
borrow
more
cash
wermeetexpense왝

Amortization of bond premium:

• Allocated to expense in each period
• Decreases amount of interest expense reported each period
• Amount of interest expense reported each period will be less than contractual
amount paid
• As premium is amortized, its balance declines
• Carrying value of bonds will decrease, until at maturity carrying value of bonds
equals their face amount

Copyright ©2019 John Wiley & Sons, Inc.

7
Suppose Chrysler has $10,000 in 9% bonds that mature in five years. Chrysler issued
these bonds on January 1, 2000, when the market rate is 8%. Interest payments occur
each January 1 and July 1.
미래은하이자쫵
현재가치환산핵 淅 十
f p.aauaue
When the bond is issued:
Dr. Cash
f
10,405
보다bandprices
Cr. Bond Payable 10,405 pasa.ieracevanes
stiff 상태
높은

camnsuaaeio.cn 405

When the coupon payment is disbursed at the end of Period 1:

Interest expense = 10,405 * 4% = 416
Coupon payment=10,000 * 4.5% = 450
Premium amortization = 450 - 416 = 34

Dr. Interest Expense

pasabf aaiiit. t 416
Cr. Cash 450
Dr. Bond payable 34
www.ie2
현재벌때omm지급할face uae
Iii 樂疝pasanen
泓 器녦
balance
제
Tsarina
Over life of bond, Carrying Value of bond moves toward Face Value. timeperez
빨지이제
Ohneem 414
8 a asn aso
 spasae 36
carmmvau
_io.ooot 5 34
3o premiumamoreizen armn
suavedecreasedtorace
ace
mannames decreased
Summary of Bonds Payable lessamountofinterest
aover
recognize 메인

Par Discount Premium

Interest Rate Coupon = Market Coupon < Market Coupon > Market

Interest Pymts Use coupon rate Use coupon rate Use coupon rate

IIS
Interest higher lower
= Interest Pymts > Interest Pymts < Interest Pymts
Expense*

SOFP Carrying Face Value – Face Value +

Face Value
Value Discount Premium
오amazed aamortized
matmt.me
* In all three cases, the cost of borrowing (total interest cost) is theanew
face

effective rate (market rate at time of issuance).

9
 Acanarsiebands
다행이고dense
earner
Pas
offensive
Redman
Early Extinguishment of Debt

Issuing firms do not always hold the bonds to maturity

Companies pay their debt off early or they “call them back” at a pre-specified price (if the
bonds are issued with a “call” provision).

Early extinguishments of debt usually result in a gain or loss:

Gain (loss) = Book value of debt – Market value of debt
Book value = Face value – unamortized Discount (+ unamortized Premium)

Example: Lafayette Corp. issued a 5 year $1,000 face value 10% bond at a discount. One year later
the unamortized discount on the bond was 40. At that time the firm repurchased the bond for
幽
$980. What did Lafayette record? timei am facerain 40
g to
manpriceof
Dr. Bonds
d Cr. Cash
Payable 960
980
사려고 연지급때
irena
ao e aaeaauo.in
ww .adf.reaemp.am
price
renren.se painordertmore
orenren.es i
aooba sDr
Dr. Loss on Bond Redemption ㅰ 20 am carmine

as A
finiteness 10
 gan

Analysis

annistopasoff
termnames
long
Two ratios that provide information about debt-paying ability and long-run solvency
are:
• Debt to Total Assets Ratio
• Times Interest Earned Ratio

Copyright ©2019 John Wiley & Sons, Inc.

11
Analysis
가지고
mouseresource 왜서
term 능력
mg nanniesreason 있는가
To illustrate these ratios, we will use data from an LG (KOR) annual report. The
company had total liabilities of W22,839 billion, total assets of W35,528 billion,
interest expense of W827 billion, income taxes of W354 billion, and net income of
W223 billion.

Debt to Assets
Total Liabilities ÷ Total Assets =
Ratio
₩22,839 ÷ ₩35,528 = 64.3%
profitride
pongtaintedtax
Net Income + Interest Expense + Interest Times Interest
Income Tax Expense
₩223 + ₩827 + ₩354
÷

÷
Expense
₩827
=

=
SET Earned
1.70 times
on profit
쌇해야할meat
merman

능력
pas ooo

Copyright ©2019 John Wiley & Sons, Inc.

12
IFRS vs. GAAP

Similarities
• The basic calculation for bond valuation is the same under GAAP and IFRS. In
addition, the accounting for bond liability transactions is essentially the same
between GAAP and IFRS.
Differences
• Under IFRS, companies sometimes show liabilities before assets. Also, they will
sometimes show non-current liabilities before current liabilities. Neither of these
presentations is used under GAAP.
• GAAP often uses a separate discount or premium account to account for bonds
payable. IFRS records discounts or premiums as direct increases or decreases to
Bonds Payable. eswarranties
estimatednannies
• IFRS uses the term provisions to refer to liabilities of uncertain timing or amount.
Under GAAP, these are considered recordable contingent liabilities.
nanniesandon ante

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13