VIEWS: 22 PAGES: 8

• pg 1
```									                     Bond
•  Certificate issued by the borrower (issuer)
•  To the lender (bondholder)
•  Specifying (1)Face value of debt
(2) Interest on the debt
(3) Maturity date
(4) Name of the issuer
• Types of Bond: 1. Secured; 2. Unsecured
1. Convertible Bond
2. Callable Bond
Accounting for bond Issues
1. Face value : Bond interest = market rate
2. Discount : Bond interest < market rate
3. Premium : Bond interest > market rate
Example – issued \$100,000, 10% bond at face value on Sept
1, 2004. Interest is paid annual on Sept 1.

Sept 1    Cash                         100,000
2004         Bond Payable                         100,000

Dec 31    Bond Interest Exp              3,333
2004         Interest Payable                       3,333

Sept 1    Interest Exp                   6,667
2005      Interest Payable               3,333
Cash                                  10,000
Discount
Example – issued \$100,000, 10% bond at 98 on Sept 1, 2004.
Interest is paid annual on Sept 1. 2 year bond.
Sept 1        Cash                                        98,000
2004          Discount on Bond                              2,000
Bond Payable                                          100,000

Dec 31        Interest Exp                                  3,333
2004                Interest Payable                                        3,333

S-L method of amortization of discount: 1000 ÷ 12 = 83, 83 x 4month =
332

Dec 31        Interest Exp                                   332
2004                Discount on Bond                                         332
Interest on Bond               Discount on Bond
3,333                          2,000             332
332
3,665                          1,668
Balance Sheet
Dec 2004
Bond payable                 100,000
Less unamortized discount     (1,668)
Carrying value           98,332
Sept 1      Interest Exp                                     6,667
2005        Interest Payable                                 3,333
Cash                                                   10,000
Interest Exp                                          668
Discount on Bond                                         668
Interest on Bond                                 Discount on Bond
6,667                                                    1,668      668
668
1,000
Balance Sheet
Sept 1, 2005
Bond payable                      100,000
Less unamortized discount          (1,000)
Carrying value                99,000
1. Retirement (call) of bond at 97 in Dec 2004.
Gain = 97,000 – 98,3332 =1, 332
Bond Payable                      100,000
Discount on Bond                            1,668
Cash                                       97,000
Gain on Retirement of Bond                  1,332

2. If Bond is retired at 101 on Sept 1, 2005.
Loss = 101,000 – 99,000 = 2,000

Bond Payable                               100,000

Less on Retirement                           2,000

Discount on Bond                                             1,000

Cash                                                       101,000
Premium – issued \$100,000, 10% bond at 102 on Sept 1, 2004. Interest is paid
annual on Sept 1 and bond matures in two years
Sept 1          Cash                                102,000
2004                Bond Payable                                  100,000
Dec 31         Bond Interest Exp                      3,333
2004               Interest Payable                                3,333
S-L method amortization of premium: 1000 ÷ 12 = 83, 83 x 4month = 332

Dec 31           Premium on Bond                         332

2004                 Interest Exp                                      332
3,333 332                                      332       2,000
3,001                                                    1,668
Balance Sheet
Dec 31, 2004
Bond payable              100,000
Carrying value        101,668
If the premium bond is retired on Dec 31, 2004 at 101 – show journal entries:
Gain = 101,668 -101,000 = 668
Bond Payable                            100,000
Gain on Retirement                                     668
Cash                                              101,000
Sept 1       Interest Exp                               6,667
2005         Interest Payable                           3,333
Cash                                                10,000

Sept 1         Premium on Bond                              668

2005                 Interest Exp                                             668
6,667 668                                       668         1,668
1,000
Balance Sheet
Sept 1, 2005
Bond payable                  100,000