lec10 - Chapter 10: Reporting and Interpreting Bonds Slide...

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Slide 1 Chapter 10: Reporting and
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Slide 2 Key Learning Objectives Describe the characteristics of bonds. Report bonds payable and interest expense, with bonds sold at par. Report bonds payable and interest expense for bonds issued at a discount and at a premium. Report the early retirement of bonds.
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Slide 3 Long-Term Bonds Significant debt needs are often filled by issuing bonds to the public. Obj10 Obj101 Obj102 Cash Bonds
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Slide 4 Bond Classifications l Debenture bonds ( Unsecured bond) l Not secured with the pledge of a specific  asset. l Callable bonds l May be retired and repaid (called) at any time  at the option of the issuer. l Convertible bonds l May be exchanged for other securities of the issuer  (usually shares of common stock) at the option of the  An indenture is a bond contract that specifies the legal provisions of a bond issue.
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Slide 5 Bonds Payable Advantages of bonds: Stockholders maintain control because bonds are debt, not equity. Interest expense is tax deductible. The impact on earnings is often positive because money can often be borrowed at a low interest rate and invested at a higher interest rate.
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Slide 6 Bonds Payable 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
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Slide 7 1. Face Value (Maturity or Par Value, Principal) 2. Maturity Date 3. Stated Interest Rate 4. Interest Payment Dates 5. Bond Date Characteristics of Bonds Payable 6. Market Interest Rate BOND PAYABLE Face Value $1,000 Interest 10% 6/30 & 12/31 Maturity Date 1/1/19 Bond Date 1/1/09
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Slide 8 Reporting Bond Transactions Accounting for the Difference Stated Market Bond Par Value There is no difference Rate Rate Price of the Bond to account for. Market Bond The difference is accounted Rate Rate Price of the Bond for as a bond discount. Market Bond The difference is accounted Rate Rate Price of the Bond for as a bond premium. Rates Price Interest Bond = < > = < > Obj104
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Slide 9 Bonds Issued at Par On January 1, 2009, Harrah’s issues $100,000 in bonds having a stated rate of 10% annually. The bonds mature in 10 years and interest is paid semiannually. The market rate is 10% annually. Rate Rate Price of the Bond to account for. = = Date Description Debit Credit Jan 1 Cash (+A) 100,000 Bonds Payable (+L) 100,000 GENERAL JOURNAL
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Slide 10 Bonds Issued at Par Date Description Debit Credit Bond Interest Expense (+E, -SE) 5,000 Cash (-A) GENERAL JOURNAL Here is the entry made every six months to record the interest payment. Date Description Debit Credit Bonds Payable (-L) 100,000 GENERAL JOURNAL Here is the entry to record the maturity of the bonds.
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Slide 11 P10-2: Reporting Bonds Issued at Par On January 1, 2009, Donovan Company issued $300,000 in bonds that mature in five years. The bonds have a stated interest rate of 8 percent and pay interest on June 30 and December 31 each year. When the bonds were sold, the market rate of interest was 8 percent.
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This note was uploaded on 12/28/2010 for the course BUSINESS A ACCT101 taught by Professor Haifengyou during the Fall '10 term at HKUST.

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lec10 - Chapter 10: Reporting and Interpreting Bonds Slide...

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