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1、14 - 114 - 2The Nature of Long-Term DebtLiabilities signify creditors interest in a companys assets.A note payable and not receivable are two sides of the same coin.Periodic interest in the effective interest rate times the amount of the debt outstanding during the period. Debt is reported at its pr
2、esent valueA bond payable divides a large liability into many smaller liabilities.Corporations issuing bonds are obligated to repay a stated amount at a specified maturity date and period interest between the issue date.14 - 3Bonds Company Issuing BondsCompany Issuing Bonds14 - 4The Bond Indenture14
3、 - 5Recording Bonds at IssuanceOn January 1, 2011, Masterwear Industries issued $700,000 of 12% bonds. Interest of $42,000 is payable semiannually on June 30 and December 31. The bonds mature in three years an unrealistically short maturity to shorten the illustration. The entire bond issue was sold
4、 in a private placement to United Intergroup, Inc. at face amount.At Issuance (January 1)Masterwear (Issuer)Cash700,000Bonds payable 700,000United (Investor)Investment in bonds (face amount) 700,000Cash 700,00014 - 6Determining the Selling Price14 - 7Determining the Selling PriceOn January 1, 2011,
5、Masterwear Industries issued $700,000 of 12% bonds, dated January 1. Interest is payable semiannually on June 30 and December 31. The bonds mature in three years. The market yield for bonds of similar risk and maturity is 14%. The entire bond issue was purchased by United Intergroup.Because interest
6、 is paid semiannually, the present value calculations use: (a) the semiannual stated rate (6%), (b) the semiannual market rate (7%), and (c) 6 (3 x 2) semi-annual periods.Present value of an ordinary annuity of $1: n=6, i=7%present value of $1: n=6, i=7%14 - 8Bonds Issued at a DiscountMasterwear (Is
7、suer)Cash666,633Discount on bonds payable 33,367Bonds payable 700,000United (Investor)Investment in bonds 700,000Discount on bond investment 33,367Cash 666,633Alternative “net method”Masterwear (Issuer)Cash666,633Bonds payable 666,633United (Investor)Investment in bonds 666,633Cash 666,63314 - 9Dete
8、rmining Interest Effective Interest MethodInterest accrues on an outstanding debt at a constant percentage of the debt each period. Interest each period is recorded as the effective market rate of interest multiplied by the outstanding balance of the debt (during the interest period).The bond indent
9、ure calls for semiannual interest payments of only $42,000 the stated rate (6%) times the face value of $700,000. The difference ($4,664) increases the liability and is reflected as a reduction in the discount (a valuation account). Interest is recorded as expense to the issuer and revenue to the in
10、vestor. For the first six-month interest period the amount is calculated as follows: $666,633(14% 2) = $46,664Outstanding Balance Effective Rate Effective Interest14 - 10Recording Interest ExpenseThe effective interest is calculated each period as the market rate times the amount of the debt outstan
11、ding during the interest period.At the First Interest Date (June 30)Masterwear (Issuer)Interest expense46,664Discount on bonds payable 4,664Cash 42,000United (Investor)Cash42,000Discount on bond investment 4,664Investment revenue 46,664$700,000 (12% 2) = $42,000 $666,633 (14% 2) = $46,664$46,664 - $
12、42,000 = $4,664 14 - 11Bond Amortization ScheduleHere is a bond amortization schedule showing the cash interest, effective interest, discount amortization, and the carrying value of the bonds.$666,633 + $4,664 = $671,29714 - 12Zero-Coupon Bonds14 - 13Bond Issued at PremiumOn January 1, 2011, Masterw
13、ear Industries issued $700,000 of 12% bonds, dated January 1. Interest is payable semiannually on June 30 and December 31. The bonds mature in three years. The market yield for bonds of similar risk and maturity is . The entire bond issue was purchased by United Intergroup.Because interest is paid s
14、emiannually, the present value calculations use: (a) the semiannual stated rate (6%), (b) the semiannual market rate (5%), and (c) 6 (3 x 2) semi-annual periods.Present value of an ordinary annuity of $1: n=6, i=6%present value of $1: n=6, i=5%14 - 14Premium Amortization ScheduleHere is a bond amort
15、ization schedule showing the cash interest, effective interest, premium amortization, and the carrying value of the bonds.$735,533 - $5,223 = $730,310$735,533 5% = $36,77714 - 15Bonds Sold at a PremiumMasterwear (Issuer)Cash735,533Premium on bonds payable 35,533Bonds payable 700,000United (Investor)
16、Investment in bonds 700,000Premium on bond investment 35,533Cash 735,533Interest expense and interest revenue will be recognized in a manner consistent with bonds issued at a discount.14 - 16Premium and Discount Amortization Compared1/1/1112/31/13$700,000$735,533$666,633Premium AmortizationDiscount Amortization14 - 17When Financial Statements Are Prepared Between Interest DatesOn January 1, 2011, Masterwear Industries issued $700,000 of 12% bonds, dated January 1. Interest is payable semiannuall
