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Bonds
Chapter 13 from Financial Accounting
Bonds
 A form of interest bearing note
 Requires periodic interest payments
 The face amount must be repaid at the
maturity date
 Bondholders are creditors of the issuing
corporation
Terminology
 Bond Indenture

Contract with
bondholders
 Principal

Face value of each bond
Types of Bonds





Term Bonds
Serial Bonds
Convertible bonds
Callable bonds
Debenture bonds
Present Value & Bonds
 Price that buyers are willing to pay for the
bonds dependent upon



The face amount of the bonds
Periodic interest to be paid
Market rate of interest
Interest
 Coupon rate –

Rate of interest stated
on the bonds
 Market or effective rate

Interest determined by
market conditions
Interest rates
 If the Market rate =
coupon rate

BONDS sells at FACE
 If the market rate >
Coupon rate


BONDS sells BELOW Face
DISCOUNT
 If the market rate < coupon
rate


BONDS sells ABOVE face
PREMIUM
Accounting for Bonds
 Bonds issued at face value

Cash


DR
Bonds payable
CR
Interest exp DR

Cash
CR
Bonds at Discount
 Steps:




Compute the PV of the face amount
Computer the PV of the interest payments
Add the amounts in the first two steps
Face amount – selling price = discount
Bonds at Discount
 Entry:


Cash
Discount

DR
DR
Bonds payable
CR
 Example: Corp sells $100,000 of 5 years
bonds with a coupon rate of interest of 12%
and market rate of interest of 13%. Interest
is $6,000 is paid semiannually.
Example 3:
Selling Price of Bonds
PV of FACE ( 100,000, r = 13%/2, p = 5 X 2)
$100,000 X .53273 =
$53,273
PV of Interest pay ($6,000, r = 6.5%, p =10)
$6,000 X 7.1883 =
Selling price of bonds
43,130
96,403
Example 3
Face value
$100,000
Selling price
96,403
Discount
3,597
ENTRY:
Cash
Discount
Bonds payable
96,403
3,597
100,000
Example 4:
PV( $200,000, r 11%/2, p = 10)
$200,000 X .58543
=
$117,086
PV ( $10,000, r 11%/2, p=10)
$10,000 X 7.53763
=
75,376
Selling price
192,462
Face
200,000
Discount
7,538
Example 4
Entry:
Cash
192,462
Discount
7,538
Bonds payable
200,000
Amortization of Bond Discount
 Two methods

Straight line method


Discount amortized = Discount/# of interest payments
Effective interest method
Example 5
 Discount amortized = 3594/10 = $359.4
 Interest expense 6,360
Discount
360
Cash
6,000

Example 6
 Interest exp 3780
 discount
780
 cash
3000
Discount amortized = 7800/10 = $780

Bonds issued at Premium
 Same as discount
 Face amount – selling price = premium
 Entry:
Cash
DR
Bonds payable
CR
Premium
CR
Example 3
 Corporation sells $100,000 of 5 year bond
with a coupon rate of interest of 12% and
market rate of interest of 11%. Interest of
$6,000 is paid semiannually.
Example 3
PV ( $100,000, r=11%/2, p =10)
$100,000 X .58543
=
$58,543
PV($6,000, r=11%/2, p=10)
$6,000 X 7.53763
=
45,226
Selling price
103,769
Face
100,000
Premium
3,769
Example 3
 Cash
103,769

Premium
3,769

Bonds payable 100,000
Example 4
 PV( $200,000, p=10, r =5%)
 $200,000 * .61391
=
 PV($11,000, p =10, r=%)
 $11,000 * 7.72174
=
 Selling price
 Face
 Premium
$122,782
89,939
207,721
200,000
7,721
Entry
 Cash


207,721
Premium
Bonds payable
7,721
200,000
Premium Amortization
 Straight line method


Amortized = Premium/# of interest payment
Example 5:
Amortized = 3594/10 = $360
 Interest exp
5640
 Premium
360

Cash
6,000

Example 6
 Amortized = 7800/10 = $780
 Interest exp 7020
 Premium
780

Cash
7800
Homework



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EX 13-8
EX 13-9
Ex 13-11
EX 13-12
EX 13-13
Update
 Wed 12/3: Review
 Test Three





Differential analysis
Capital investment
analysis
Cash flows
Bonds
Multiple choice/ short
problems
 Monday 12/8


Homework due
Test three
 Wednesday 12/10

Review for final
examination
 Monday 12/15

Final Examination