This preview shows page 1. Sign up to view the full content.
Unformatted text preview: Chapter 17 Chapter Part 2 – Bonds Payable
Bond Premiums Issuing Bonds at a Premium Issuing Premium on Bonds Payable is an Premium account used when bonds are issued at a value greater than 100% of par. at It is an adjunct (also called accretion) It liability account which is added to the par value of the bonds to produce the carrying (or book) value of the bonds. carrying Issuing Bonds at a Premium Issuing Both the face value of the bond and the Both premium are shown on the balance sheet presentation. sheet The book value of the bonds at the date The of issue is always equal to the cash price of the bonds. price Issuing Bonds at a Premium Issuing Interest payments are calculated on the face Interest value of the bond, not the cash received for them. them. Example: On January 1, 2003, XYZ Corporation issues On $100,000 par value bonds for cash of $108,983, bearing interest of 6% for the bond term of five years. Interest is paid semiterm annually. Issuing Bonds at a Premium Issuing
Date Jan 1 Account Title and Explanation Cash Premium on bonds payable Bonds Payable
Sold b onds at a premium Debit 108,983 Credit 8,983 100,000 Balance Sheet Presentation:
Long-term Liabilities: Bonds payable, 6%, due January 1, 2008 $ 100,000 8,983 Add: Premium on bonds payable 108,983 Amortizing Bond Premiums Amortizing The bond premium calculated must be The amortized over the life of the bond. amortized Don’t forget accrual if the interest Don’t period and accounting period do not coincide. coincide. Also accrue the amortization of the Also bond premium. bond Amortizing Bond Premiums Amortizing There are two methods to amortize the There premium: premium:
Straight-Line Method Effective Interest Method Straight-Line Method Straight-Line The interest expense for each period is The the same for each payment made throughout the life of the bond. throughout The amortization of the premium is The therefore the same. therefore Straight-Line Method Straight-Line The total interest expense over the life The of the bond needs to be determined in order to calculate the expense and amortization for each period. amortization Interest expense from prior example is:
Ten paym ents of $3,000 ($100,000 x 6% x 6/12) Par value at m aturity Total repaid to bondholders L es s : Am ount borrowed from bondholders Total bond interes t expens e $ 30,000 100,000 $ 130,000 108,983 $ 21,017 Straight-Line Method Amortization Table Amortization
Cash Interest Interest Premium Unamort. Carrying Paid Expense A mort. Premium V alue a b c d e Period $100,000 x 3% 21,017/10 8,983/10 $100,000 + d Jan 1/03 8,983 108,983 Jul 1/03 3,000 2,102 898 8,085 108,085 Jan 1/04 3,000 2,102 898 7,187 107,187 ….. …… ….. ….. ….. ….. Jan 1/08 3,000 * 2,099 901 100,000 Totals 30,000 21,017 8,983 * rounded Effective Interest Method Effective Interest expense decreases as the Interest bond matures because it is based on the carrying value of the bond. the The carrying value of the bond The decreases as the premium is amortized. amortized. Effective Interest Method Amortization Table Amortization
Assume market interest rate is 4%:
Cash Interest Interest Premium Unamort. Carrying Paid Expense A mort. Premium V alue a b c d e Period $100,000 x 3% (e x 2%) (a - b) $100,000 + d Jan 1/03 8,983 108,983 Jul 1/03 3,000 2,180 820 8,163 108,163 Jan 1/04 3,000 2,163 837 7,326 107,326 ….. …… ….. ….. ….. ….. Jan 1/08 3,000 * 2,019 981 100,000 Totals 30,000 21,017 8,983 * rounded Bond Premiums Bond Questions? Assignment Hints Assignment
Exercises: 17-18 c) Ending Balance Dec 31/06 $40,745 17-20 b) Carrying Value Oct 1/09 $752,599 17-21 c) Bond Interest Expense $37,987 17-22 b) Carrying Value Oct 1/09 $775,050 17-23 c) DR Premium on Bonds Payable $8,705 Assignment Hints Assignment
Problems: 17-8A 1) Ending Balance Dec. 31/07 $80,730 17-10A a) $27,823 b) Bond B – Gain on retirement $14,918 ...
View Full Document