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Lecture19

# Lecture19 - Lecture 19 Accounting for Long Term Debt...

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Lecture 19 Accounting for Long Term Debt Issuance of Bonds General Mills

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Bonds Issued at Par and Discount Following is an example of the accounting for a bond issued at par (net book value = par value) and at a discount (net book value < par value). The terms of the bond (cash payment schedule) is identical to that used in the class discussion. However, the historical market rate of interest is different, causing the present value of the bond payments (the net book value of the bond) to be different.
Bond Issued at Par Historical Market Rate (13%, semi-annual) = Coupon Rate (13%, semi-annual) Valuation at issuance: P.V. of \$50 mill. @ 6.5% (n = 10) = 26,636,302 P.V. of \$3.25 mill @ 6.5% (annuity, n = 10) = 23,363,698 50,000,000 The market value of the bond on the date of issuance is equal to the present value of the bond payments using the (historical) market interest rate. Because the market rate and the coupon rate are equal, the market value is equal to the maturity value. [Because the tables in the text do not include present values for an interest rate of 6.5%, you will need to use a calculator or the present value formulae to compute the present value of the bond in this case.] Entry at issuance: Cash 50,000,000 Bonds Payable 50,000,000 The net book value of the bond liability on the date of issue is equal to the present value of the future payments using the (historical) market interest rate.

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par 50000000 coupon rate 0.13 # payments per year 2 market rate at inception 0.13 This example is for a 5 year maturity bond period 1 2 3 4 5 6 7 8 9 10 3250000 3250000 3250000 3250000 3250000 3250000 3250000 3250000 3250000 3250000 50000000 3051643 2865392.7 2690510 2526300 2372113 2227336 2091395 1963751 1843898 1731360 26636302 PV coupon 23363698 PV par 26636302 Total 50000000 Begin Interest Coupon Prem/Disc End From To Balance Expense Payment Amort Balance 1/1/x1 6/30/x1 50000000 3250000 3250000 0 50000000 7/1/x1 12/31/x1 50000000 3250000 3250000 0 50000000 1/1/x2 6/30/x2 50000000 3250000 3250000 0 50000000 7/1/x2 12/31/x2 50000000 3250000 3250000 0 50000000 1/1/x3 6/30/x3 50000000 3250000 3250000 0 50000000 7/1/x3 12/31/x3 50000000 3250000 3250000 0 50000000 1/1/x4 6/30/x4 50000000 3250000 3250000 0 50000000 7/1/x4 12/31/x4 50000000 3250000 3250000 0 50000000 1/1/x5 6/30/x5 50000000 3250000 3250000 0 50000000 7/1/x5 12/31/x5 50000000 3250000 3250000 0 50000000
Bond Issued at Par Entry at 6/30/x1: To record interest and payment Interest Expense 3,250,000 Bonds Payable 3,250,000 Bonds Payable 3,250,000 Cash 3,250,000 Interest Exp. = 50,000,000 x 6.5% = 3,250,000 Note: When a bond is issued at par, the interest expense each period is always equal to the amount of the coupon payment Entry at 12/31/x1: To record interest and payment Interest Expense 3,250,000 Bonds Payable 3,250,000 Bonds Payable 3,250,000 Cash 3,250,000 Interest Exp. = 50,000,000 x 6.5% = 3,250,000

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Bond Issued at Par Entry at 12/31/x1: To reclassify current portion of bond Can you make the entry to reclassify the current portion of the bond? Can you complete the entries for the remainder of the bond’s life?
Bond Issued at a Discount Historical Market Rate (14%, semi-annual) > Coupon Rate (13%, semi-annual) Valuation at issuance: P.V. of \$50 mill. @ 7.0% (n = 10) = 25,417,465 P.V. of \$3.25 mill @ 7.0% (annuity, n = 10) = 22,826,640 48,244,105 When the (historical) market interest rate is greater than the coupon rate, the present value of the future bond payments will be less than the bond’s par value.

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Lecture19 - Lecture 19 Accounting for Long Term Debt...

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