Download - Bond Liabilities

Significant debt needs of a company are often

filled by issuing bonds.

Significant debt needs of a company are often

filled by issuing bonds.

Bonds

Cash

Bond Liabilities

Bonds 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)

Bonds 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 Liabilities

Bonds 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 × Time

Bond 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.

Bonds 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 × Time

Bond 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 Liabilities

Bond Certificateat Face Value


Bond Issue Date

Bond Selling Price

Corporation Investors

Bond Liabilities

Bond Issue Date

Bond Interest Payments

Bond Interest PaymentsCorporation Investors

Interest Payment = Principal × Interest Rate ×

Time

Interest Payment = Principal × Interest Rate ×

Time

Bond Liabilities

Bond Issue Date

Bond Principal

at Maturity Date

Bond Maturity

Date

Corporation Investors

Bond Liabilities

Bond Liabilities

Advantages 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.

Advantages 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.

Blair 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)

Blair 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 Selling Price

Blair Company Investors

Bonds Issued at Face Value


Issuing the bonds has the following effecton Blair’s 2005 financial statements:Issuing the bonds has the following effecton Blair’s 2005 financial statements:

To record the bond issue, Blair Company wouldmake the following entry on January 1, 2005:To record the bond issue, Blair Company wouldmake the following entry on January 1, 2005:

Account Title Debit CreditCash 1,000,000 Bonds Payable 1,000,000


Bond Interest Payments

Blair Company Investors

On each interest payment date, Blair Company will pay $45,000 in interest. The amount is computed as follows:

On 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 $1,000, 000 × 9% × 6/12 = $45,000


The June 30, 2005 interest payment (and all other semiannual interestpayments) has the following effect on Blair’s financial statements:The June 30, 2005 interest payment (and all other semiannual interestpayments) has the following effect on Blair’s financial statements:

To record an interest payment, Blair Company would makethe following entry on each June 30 and December 31:To record an interest payment, Blair Company would makethe following entry on each June 30 and December 31:

Account Title Debit CreditInterest Expense 45,000 Cash 45,000


Bond Principal

at Maturity Date

Blair Company

Investors

On December 31, 2024, Blair Company will return the $1,000,000 principal amount to the

investors.

On December 31, 2024, Blair Company will return the $1,000,000 principal amount to the

investors.


The principal repayment on December 31, 2024 will have thefollowing effect on Blair’s 2024 financial statements:The principal repayment on December 31, 2024 will have thefollowing effect on Blair’s 2024 financial statements:

To record an the principal repayment, Blair Company would makethe following entry on December 31, 2024:To record an the principal repayment, Blair Company would makethe following entry on December 31, 2024:

Account Title Debit CreditBonds Payable 1,000,000 Cash 1,000,000