Chapter_10___11 ppt - Chapter 10. Reporting and...

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Unformatted text preview: Chapter 10. Reporting and Interpreting Bonds Very Exciting Stuff Preview What are they really / transactions and other important fun stuff. Bonds Issued At Par Bonds Issued at a Discount Zero Coupon Bonds Bonds Issued at a Premium Interest Calculations Early Retirement of Debt Your favoritefocus on Cash Flows! Advantages of Bonds Stockholders maintain control because bonds are debt, not equity. Interest expense is tax deductible. The impact on earnings is positive because money can often be borrowed at a low interest rate and invested at a higher interest rate. Disadvantages of Bonds Risk of bankruptcy exists because the interest and debt must be paid back as scheduled or creditors will force legal action. Negative impact on cash flows exists because interest and principal must be repaid in the future. Characteristics of Bonds Payable $ Bond Issue Price $ Bond Certificate At Bond Issuance Date Bonds payable are long-term debt for the issuing company. Company Issuing Bonds Investor Buying Bonds Characteristics of Bonds Payable Periodic Interest Payments $ $ Principal Payment at End of Bond Term $ $ Company Issuing Bonds Investor Buying Bonds Fun Definitions Debenture bonds Debenture bonds Not secured with the pledge of a specific asset. Callable bonds Callable bonds May be retired and repaid (called) at any time at the option of the issuer. Convertible bonds Convertible bonds May be exchanged for other securities of the issuer (usually shares of common stock) at the option of the bondholder. Bond Transactions When a company issues bonds, it When a company issues bonds, it specifies two cash flows related to the specifies two cash flows related to the transaction: transaction: Principal Interest Reporting Bond Transactions The issue price of the bond is determined by the market, based on the time value of money. The interest rate used to compute the present value is the market interest rate market interest rate. Use your tables to get the factors to find the present values! (they will be given to you at the exam) Very Important Interest Rates Bond Price Accounting for the difference Stated Rate = Market Rate Bond Price = Par Value of Bond There is no difference to account for Stated Rate < Market Rate Bond Price < Par Value of Bond The difference is accounted for as a BOND DISCOUNT State Rate > Market Rate Bond Price > Par Value of Bond The difference is accounted for as a BOND PREMIUM Issued at Par Journal Entries Issuance of the Bond....
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Chapter_10___11 ppt - Chapter 10. Reporting and...

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