Chapter 10 Bonds Payable NonCurrent Liabilities Due more
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)
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
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)
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
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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