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1、Chapter 9 Bonds and Long-Term NotesBondsMedium-and large-sized company often choose to borrow cash by issuing bonds.A bond issue divides a large liability into many smaller liabilitiesBonds obligate the issuing company to repay a stated amount at a specified maturity date and periodic interest betwe
2、en the issue date and maturity.Issue dateMaturity dateface amount+interestFace amount stated rateThe bond indentureA bond indenturedescribes the specific promises made to bondholdersThe bond indenture is held by a trustee(commercial bank、other financial institution)Two participants:issuing company(i
3、ssuer)/bondholder(investor)Debenture bond(无担保债券)Subordinated debenture(次级无担保债券)Mortgage bond（抵押债券）Callable bond（可赎回债券）Convertible bonds(可转换债券)Issuing the bondBonds can be issued in three ways:Issued at face value(price=face amount)Stated rate=Market rateIssued at a discount(priceface amount)Stated r
4、ateface amount)Stated rateMarket rateOther things being equal,the lower the perceived riskiness of the bonds,the higher the price those bonds will command Recording bonds issuanceBonds issued at face amountIllustration 9-1 P373On Jan.1,2011,issued the bond:Issuer:Dr.Cash 700,000 Cr.Bonds payable 700
5、,000Investor:Dr.Investment in bonds 700,000 Cr.Cash 700,000LiabilityAsset Recording bonds issuanceIllustration 9-1 P373On June 30,2011,paid the interest:First interest payment =700,00012%(6/12)=$42,000Issuer:Dr.Interest expense 42,000 Cr.Cash 42,000Investor:Dr.Cash 42,000 Cr.Investment revenue 42,00
6、0Recording bonds issuanceIllustration 9-1 P373On Dec 31 2011,June 30 2012,Dec 31 2012,June 30 2013,make the same journal entry to record the interest payment.On Dec.31,2013,bonds were mature:Issuer:Dr.Interest expense 42,000 Cr.Cash 42,000 Dr.Bonds payable 700,000 Cr.Cash 700,000Recording bonds issu
7、ancev Bonds issued at a discountvThe issuing price?Price=PV of interest+PV of face amount Illustration 9-2 P375 PV of interest:Interest payment=$700,00012%(6/12)=$42,000 n=23=6 semiannual periods i=14%(6/12)=7%PV of interest=$42,0004.76654=$200,195Recording bonds issuance Illustration 9-2 P375 PV of
8、 face amount:Face amount=$700,000 n=23=6 semiannual periods i=14%(6/12)=7%PV=$700,0000.66634=$466,438 Price=$200,195+$466,438=$666,633Recording bonds issuance Illustration 9-2 P375 On Jan.1,2011,issued the bonds:Issuer:Dr.Cash 666,633 Discount on bonds payable 33,367 Cr.Bonds payable 700,000 The dif
9、ference between the effective interest and the interest paid increases the existing liability Effective interest=market rateoutstanding balance Recording bonds issuanceIllustration 9-2 P375On June 30,2011,paid the interest:Interest expense =$666,63314%(6/12)=$46,664 Interest actually paid=Face amoun
10、t Stated rate =$700,00012%(6/12)=$42,000 Dr.Interest expense 46,664 Cr.Cash 42,000 Discount on bonds payable 4,664 On Dec.31,2011the outstanding balance =$666,633+$4,664=671297Recording bonds issuanceIllustration 9-2 P375 On Dec.31,2011,paid the interest:Interest expense =$671,29714%(6/12)=$46,991 I
11、nterest actually paid =$700,00012%(6/12)=$42,000 Dr.Interest expense 46,991 Cr.Cash 42,000 Discount on bonds payable 4,991 Recording bonds issuanceIllustration 9-2 P375 On June 30 2012,Dec.31 2012,June 30 2013,make the same journal entry to record the interest payments:On Dec.31,2013 bonds were matu
12、re:Interest expense =$693,45614%(6/12)=$48,544 Dr.Interest expense 48,544 Cr.Cash 42,000 Discount on bonds payable 6,544 Dr.Bonds payable 700,000 Cr.Cash 700,000Recording bonds issuanceBonds issued at a premium Issuing price:Price=PV of interest+PV of face amount Illustration 9-3 P378 PV of interest
13、:Interest payment =$700,00012%(6/12)=$42,000 n=23=6 semiannual periods i=10%(6/12)=5%PV of interest=$42,0005.07569=$213,179Recording bonds issuanceIllustration 9-3 P378 PV of face amount:Face amount=$700,000 n=23=6 semiannual periods i=10%(6/12)=5%PV of face amount =$700,0000.74622=$522,354Recording
14、 bonds issuanceIllustration 9-3 P378 Price of the bonds =PV of interest+PV of face amount =$213,179+$522,354=$735,533 On Jan.1,2011,issued the bonds:Dr.Cash 735,533 Cr.Bonds payable 700,000 Premium on bonds payable 35,533Recording bonds issuanceIllustration 9-3 P378 On June 30,2011,paid the interest
15、:Interest expense =$735,53310%(6/12)=$36,777 Interest actually paid =$700,00012%(6/12)=$42,000 Dr.Interest expense 36,777 Premium on bonds payable 5,223 Cr.Cash 42,000Recording bonds issuanceIllustration 9-3 P378 On June 30 2012,Dec.312012,June 30 2013,make the same journal entry to record the inter
16、est payments:On Dec.31,2013,bonds were mature:Interest expense =$70667110%(6/12)=$35,329 Interest actually paid =$700,00012%(6/12)=$42,000 Dr.Interest expense 35,329 Premium on bonds payable 6,671 Cr.Cash 42,000 Dr.Bonds payable 700,000 Cr.Cash 700,000A zero-coupon bonds pay no interest.It offers a
17、return in the form of a“deep discount”from the face amount The present value of$2,230,discounted at 2%for 20years,is$1,501 Graphic 9-5 P378Zero-coupon bondsBetween interest datesAny interest that has accrued since the last interest date must be recorded by an adjusting ebtry prior to preparing finci
18、al statements Example P380 October 31 Dr.Interest expense$31,327 Cr.Discount on bonds$3,327 Interest payable$28,000 December 31 Dr.Interest expense$15,664 Interest payable$28,000 Cr.Discount on bonds payable$1,664 Cash$42,000Between interest datesThe straight-line methodA company is allowed to determine interest indirectly by allocating a discount or a premium equally to each period over the term to maturity Interest dates$33,3676=$5,561 per period Dr.Interest expense$47,561 Cr.Discount on bonds payable$5,561 Cash$42,000