Chapter 8 - Part 3

# Chapter 8 - Part 3 - Chapter 8 Liabilities Part 3 Bonds Dr...

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Ron Lazer, Ph.D. Chapter 8, Page 1 Chapter 8: Liabilities Part 3 – Bonds Dr. Ron Lazer Quiz Seven square6 Date: Tuesday, November 17 th, 2009 square6 Content: Chapter 8 (specific instructions will be provided during class) square6 Allowed materials: box2 4 function calculator box2 FV, PV, and PVA tables (provided) Ron Lazer, Ph.D.

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Ron Lazer, Ph.D. Chapter 8, Page 2 Financial Accounting GAAP The Accounting Information System Financial Statements Balance Sheet Income Statement Ron Lazer, Ph.D. Chapter 8 Part 3 Objectives square6 Bond Accounting: box2 Par value bonds box2 Premium / Discount bonds box2 Interest Expense box2 Gain/Loss from early retirement of bonds square6 The Times-Interest-Earned Ratio Ron Lazer, Ph.D.
Ron Lazer, Ph.D. Chapter 8, Page 3 Present Value Concepts square6 To record activities in the general ledger dealing with future cash flows , we should calculate the present value of the future cash flows using present value formulas or techniques. square6 Examples of types of activities that require PV calculations: box2 Long term notes payable box2 bonds payable and bond investments box2 capital leases square6 We will focus only on bonds payable!! Bonds Payable square6 Bonds payable are issued by a company (usually to the marketplace) to generate cash flow. square6 The bonds represent a promise by the company to pay a stated interest (also called the coupon rate) each period (yearly, semiannually, quarterly), and pay the face amount of the bond at maturity. square6 The marketplace values bonds by discounting the cash flows using the market rate of interest. This is also called the yield rate, discount rate, or effective rate. square6 There are two types of cash flows with bonds: PVA (for the interest payments) and PV (for the payment of the maturity value).

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Ron Lazer, Ph.D. Chapter 8, Page 4 Bond Accounting On December 31, 2009, company A issued \$10,000,000, payable in 2-year, 10% bonds. Interest is to be paid semi annually on June 30 and December 31. Assuming that the bonds are held to maturity and were issued at par, the journal entries to be recorded by the company are: To record the issuance of the bonds (12/31/09) To record the payments of the semi-annual interest (6/30/2010, 12/31/2010, 6/30/2011, 12/31/2011) To record the repayment of principal at maturity (12/31/11) Ron Lazer, Ph.D. Issuing and Trading Bonds square6 The bond contract includes all terms of the bonds such as: box2 Maturity date or Time to maturity (n) box2 Interest payment dates box2 Interest amounts (stated rate, coupons, PMT, A) box2 Principal amount - Size of the bond issue (FV) Ron Lazer, Ph.D.
Ron Lazer, Ph.D. Chapter 8, Page 5 Issuing and Trading Bonds The stated (coupon) rate on the bonds is set as close to the market rate (i) as possible. box2 The stated rate is the interest rate to be paid (in cash) on the bonds.

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