Download Chapter 10: Bonds Payable

Chapter 10: Bonds Payable
• Non-Current Liabilities
– Due more than one year from balance
sheet date
– Currently maturing bonds payable need
to be transferred to current liability
status
• When issued two obligations occur
– Payment of periodic interest (Annuity)
– Payment of principal when due (1
payment)
Issue Price of Bonds
• Depends on the difference between the
interest rate stated on the bonds and
the issue date market rate of interest
• If the same, issue price is the same as
maturity value (payback amount)
• If stated rate is greater than market
rate, issue price is a premium
• If market rate is greater than stated
rate, issue price is a discount
Bond Issue Price Determination
• Use market interest rate and number of
payments to determine factors from
present value tables
• Issue price is the sum of:
– Present value of periodic interest
payments (factor * interest payment)
– Present value of the one payment at
maturity (factor * maturity value)
Ex 10-15:Bond Issue Price Example
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Principal and maturity value-$1,000
Stated interest rate-9%; Market-11%
Interest payable annually
Issue date-January 1, 2003 (3 Years)
PV of Interest (2.4437 * $90 = 219.93)
PV of Payment (.7312 * $1,000=731.20)
Proceeds = $219.93 + 731.20 = $951.13
Adjustment of Interest Paid to
Interest Expense Annually
• Two methods may be used
– Effective Interest: Multiply beginning
book value of bonds by market rate
of interest
– Straight line: Divide total discount or
premium at issuance by number of
interest payments and adjust an equal
amount each interest payment date
• Difference in market rate and paid
rate is then amortized from book
value of bonds