Embed Size (px)
Transcript of Bond Liabilities
Bond LiabilitiesSignificant debt needs of a company are often filled by issuing bonds.BondsCash
Bond LiabilitiesBonds involve the long-term borrowing of a large sum of money.At maturity, the principal (or face value) is paid back as a lump sum. Individual bonds are often denominated with a face value, of $1,000.The Selling price of a bond is stated as a percentage of its face value (e.g., a $1,000 face value bond selling at 96% would have a current selling price of $960)
Bond LiabilitiesBonds usually have periodic interest payments based on a stated rate of interest.Interest is normally paid semiannually.Cash Interest paid is computed as:Interest = Principal Stated Rate TimeBond prices are usually quoted as a percentage of the face amount.For example, a $1,000 bond priced at 104 would sell for $1,040.
Bond LiabilitiesBond Certificateat Face ValueBond Issue DateBond Selling PriceCorporationInvestors
Bond LiabilitiesBond Issue DateBond Interest PaymentsBond Interest PaymentsCorporationInvestorsInterest Payment = Principal Interest Rate Time
Bond LiabilitiesBond Issue DateBond Principalat Maturity DateBond Maturity DateCorporationInvestors
Bond LiabilitiesAdvantages of bonds Bonds usually have longer terms to maturity than notes payable issued to banks. Bond interest rates are usually lower than bank loan rates.
Bonds Issued at Face ValueBlair Company issues bonds on January 1, 2005.Principal = $1,000,000Stated (CASH) Interest Rate = 9%Interest Dates = 6/30 and 12/31Maturity Date = Dec. 31, 2024 (20 years)Bond Certificateat Face ValueBond Selling PriceBlair CompanyInvestors
Bonds Issued at Face ValueIssuing the bonds has the following effect on Blairs 2005 financial statements:
Bonds Issued at Face ValueBond Interest PaymentsBlair CompanyInvestorsOn each interest payment date, Blair Company will pay $45,000 in interest. The amount is computed as follows:$1,000, 000 9% 6/12 = $45,000
Bonds Issued at Face ValueThe June 30, 2005 interest payment (and all other semiannual interest payments) has the following effect on Blairs financial statements:
Bonds Issued at Face ValueBond Principalat Maturity DateBlair CompanyInvestorsOn December 31, 2024, Blair Company will return the $1,000,000 principal amount to the investors.
Bonds Issued at Face ValueThe principal repayment on December 31, 2024 will have the following effect on Blairs 2024 financial statements:
When a company has a relatively small need for cash, the need can usually be met by a single lender, such as a bank. However, when a company needs large amounts of cash, one creditor may not be able to loan the amount required, or may not be willing to take on all the risk of such a large loan. So, in this case, many companies issue bonds to lots of different people and institutions to acquire the needed funds.When companies need large amounts of cash for longer periods of time, they often issue bonds. The principal on bonds is typically paid at the end of the bond period. Each bond in the total bond issue is usually denominated with a face value of one thousand dollars. Bonds normally have an interest rate that is called a stated rate. Interest is normally paid semiannually and is computed as Principal times Rate times Time. This computation should look familiar to you. Since bonds are bought and sold in the market, they have a market value, or price. For convenience, bond market values are expressed as a percent of their face value.
On the issue date, the bondholders give the company the market value, or selling price of the bond issue. The company gives the bondholders a bond certificate promising to pay periodic interest and to return the principal on the maturity date. At regularly scheduled dates during the life of the bond, the company pays the bondholders interest. Interest is calculated as bond face value times the stated interest rate on the bond times the time the bond has been outstanding during the year. At the maturity date, the company pays the bondholders the bonds face value.Bonds offer advantages for the issuing company. They usually usually have longer terms to maturity than notes payable issued to banks, often twenty or thirty years. In addition, bond interest rates are usually lower than bank loan rates.
Blair Company issues bonds at face value. This means that the stated interest rate on the bond and the market interest rate on the bond are equal. Blairs bonds have a face value of one million dollars, a stated interest rate of nine percent with interest payable on June 30 and December 31 of each year. The bonds are issued on January 1, 2005, and mature twenty years later on December 31, 2024.On the issue date, the bondholders give Blair Company the selling price of the bond issue, and Blair Company gives the bondholders a bond certificate promising to pay periodic interest and to return the principal on the maturity date.
Part IIssuing the bond payable increases both assets (Cash) and liabilities (Bonds Payable). There is no effect on the income statement when the note is issued. The cash inflow is reported in the financing section of the Statement of Cash Flows.Part IIOn the issue date, Blair Company would debit Cash and credit Bonds Payable for one million dollars. The Bonds Payable account is always credited for the face value, or maturity value, of the bonds.
On the each interest payment date for the twenty-year term of the bond issue, Blair will pay the bondholders a total of forty-five thousand dollars in interest. The interest is calculated by multiplying one million dollars times nine percent times six months divided by twelve months. Part IEach interest payment decreases assets (Cash) and decreases Equity (Retained Earnings) by the amount of the interest payment. Net income also decreases by the amount of the interest payment. The interest payment is reported in the operating section of the Statement of Cash Flows. Part IIOn the each interest payment date for the twenty-year term of the bond issue, Blair will debit Bond Interest Expense and credit Cash for forty-five thousand dollars. On the maturity date, Blair Company will pay the bondholders one million dollars, the face amount of the bonds. At this time, the debt is extinguished.
Part IThe repayment at maturity decreases assets (Cash) and decreases liabilities (Bonds Payable) by one million dollars. Net income is not effected by the repayment. The repayment is reported in the financing section of the Statement of Cash Flows. Part IIOn the maturity date, Blair Company will record the payment of the face amount of the bonds by debiting Bonds Payable and crediting Cash for one million dollars.