Articulation Examples - Bond and Investment Friday,...

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Understand the differences in underlying economic reality and the purpose of financial reporting => how best to account for them Bond and investment are 2 examples What is happening here? First, look at this transaction from A's perspective. Basic features of a bond: Face value: F = 1,000 K Coupon rate: Rc = 5% => Coupon: C = F * Rc = 1,000 * 5% = 50 K Maturity: n = 10 Then how much would the market be willing to pay for this bond? It depends on the market rate of return. (1) Rb = 5% => Price = NPV = 1,000 K = F => bond issued at par (2) Rb = 8% => Price = NPV < F => bond issued at discount (3) Rb = 3% => Price = NPV > F => bond issued at premium Market rate of return for the bond: 3 situations What is the conventional way to record this transaction? Bond is a contract: At bond issuance date: CR. Bonds payable (F) (1) DR. Cash (Price) Discount on BP (diff) CR. Bonds payable (F) (2) DR. Cash (Price) (3) DR. Cash (Price) At every fiscal period end: CR. Interest payable (1) DR. Interest expense CR. Interest payable Discount on BP (2) DR. Interest expense (3) DR. Interest expense At coupon payment date:
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This note was uploaded on 02/16/2012 for the course ACCY 510 taught by Professor Staff during the Fall '08 term at University of Illinois, Urbana Champaign.

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Articulation Examples - Bond and Investment Friday,...

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