Chapter 10 Acct Bonds - Chapter 10 Accounting Explain how...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 10 Accounting Explain how to account for bond transactions. A corporation records bond transactions when it issues (sells) or redeems (buys back) bonds and when bondholders convert bonds into common stock. If bondholders sell their bond investments to other investors, the issuing corporation receives no further money on the transaction, nor does the issuing corporation journalize the transaction (although it does keep records of the names of bondholders in some cases). Bonds may be issued at face value, below face value (discount), or above face value (premium). Bond prices for both new issues and existing bonds are quoted as a percentage of the face value of the bond. Face value is usually $1,000 . Thus, a $1,000 bond with a quoted price of 97 means that the selling price of the bond is 97% of face value, or $970. ISSUING BONDS AT FACE VALUE To illustrate the accounting for bonds issued at face value, assume that Devor Corporation issues 100, five-year, 10%, $1,000 bonds dated January 1, 2017, at 100 (100% of face value). The entry to record the sale is as follows. Jan. 1 Cash 10,0 00 Bonds Payable 10,0 00 (To record sale of bonds at face value) Devor reports bonds payable in the long-term liabilities section of the balance sheet because the maturity date is January 1, 2022 (more than one year away). Over the term (life) of the bonds, companies make entries to record bond interest. Interest on bonds payable is computed in the same manner as interest on notes payable, as explained earlier. If we assume that interest is payable annually on January 1 on the bonds described above, Devor accrues interest of $10,000 ($100,000×10%×1212) on December 31. At December 31, Devor recognizes the $10,000 of interest expense incurred with the following adjusting entry. Dec. 31 Interest Expense 10,0 00 Interest Payable 10,0
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
00 (To accrue bond interest) The company classifies interest payable as a current liability because it is scheduled for payment within the next year. When Devor pays the interest on January 1, 2018, it decreases (debits) Interest Payable and decreases (credits) Cash for $10,000. Devor records the payment on January 1 as follows. Jan. 1 Interest Payable 10,0 00 Cash 10,0 00 (To record payment of bond interest) DISCOUNT OR PREMIUM ON BONDS The previous example assumed that the contractual (stated) interest rate and the market (effective) interest rate paid on bonds were the same. Recall that the contractual interest rate is the rate applied to the face (par) value to arrive at the interest paid in a year. The market interest rate is the rate investors demand for loaning funds to the corporation. When the contractual interest rate and the market interest rate are the same, bonds sell at face value . However, market interest rates change daily. The type of bond issued, the state of the economy, current industry conditions, and the company's individual performance all affect market interest rates. As a result, the contractual and market interest rates often differ. To make bonds salable when the two rates differ, bonds sell below or above face value.
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern