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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 • • • • • • • 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