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 s Date: Tuesday, November 17 th, 2009 s Content: Chapter 8 (specific instructions will be provided during class) s Allowed materials: b 4 function calculator b 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 s Bond Accounting: b Par value bonds b Premium / Discount bonds b Interest Expense b Gain/Loss from early retirement of bonds s The Times-Interest-Earned Ratio Ron Lazer, Ph.D.
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Ron Lazer, Ph.D. Chapter 8, Page 3 Present Value Concepts s 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. s Examples of types of activities that require PV calculations: b Long term notes payable b bonds payable and bond investments b capital leases s We will focus only on bonds payable!! Bonds Payable s Bonds payable are issued by a company (usually to the marketplace) to generate cash flow. s 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. s 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. s 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 s The bond contract includes all terms of the bonds such as: b Maturity date or Time to maturity (n) b Interest payment dates b Interest amounts (stated rate, coupons, PMT, A) b Principal amount - Size of the bond issue (FV) Ron Lazer, Ph.D.
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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. b The stated rate is the interest rate to be paid (in cash) on the bonds. b
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This note was uploaded on 01/09/2010 for the course ACCT 2331 taught by Professor Staff during the Fall '08 term at University of Houston.

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

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