chapter 10: bonds payable non-current liabilities –due more than one year from balance sheet date...

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Chapter 10: Bonds Payable • Non-Current Liabilities – Due more than one year from balance sheet date – Currently maturing bonds payable need to be transferred to current liability status • When issued two obligations occur – Payment of periodic interest (Annuity) – Payment of principal when due (1 payment)

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Page 1: Chapter 10: Bonds Payable Non-Current Liabilities –Due more than one year from balance sheet date –Currently maturing bonds payable need to be transferred

Chapter 10: Bonds Payable

• Non-Current Liabilities– Due more than one year from balance

sheet date– Currently maturing bonds payable need

to be transferred to current liability status

• When issued two obligations occur– Payment of periodic interest (Annuity)– Payment of principal when due (1

payment)

Page 2: Chapter 10: Bonds Payable Non-Current Liabilities –Due more than one year from balance sheet date –Currently maturing bonds payable need to be transferred

Issue Price of Bonds

• Depends on the difference between the interest rate stated on the bonds and the issue date market rate of interest

• If the same, issue price is the same as maturity value (payback amount)

• If stated rate is greater than market rate, issue price is a premium

• If market rate is greater than stated rate, issue price is a discount

Page 3: Chapter 10: Bonds Payable Non-Current Liabilities –Due more than one year from balance sheet date –Currently maturing bonds payable need to be transferred

Bond Issue Price Determination

• Use market interest rate and number of payments to determine factors from present value tables

• Issue price is the sum of:– Present value of periodic interest

payments (factor * interest payment)– Present value of the one payment at

maturity (factor * maturity value)

Page 4: Chapter 10: Bonds Payable Non-Current Liabilities –Due more than one year from balance sheet date –Currently maturing bonds payable need to be transferred

Ex 10-15:Bond Issue Price Example

• Principal and maturity value-$1,000

• Stated interest rate-9%; Market-11%

• Interest payable annually

• Issue date-January 1, 2003 (3 Years)

• PV of Interest (2.4437 * $90 = 219.93)

• PV of Payment (.7312 * $1,000=731.20)

• Proceeds = $219.93 + 731.20 = $951.13

Page 5: Chapter 10: Bonds Payable Non-Current Liabilities –Due more than one year from balance sheet date –Currently maturing bonds payable need to be transferred

Adjustment of Interest Paid to Interest Expense Annually

• Two methods may be used– Effective Interest: Multiply

beginning book value of bonds by market rate of interest

– Straight line: Divide total discount or premium at issuance by number of interest payments and adjust an equal amount each interest payment date

• Difference in market rate and paid rate is then amortized from book value of bonds

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