Bond Premium by MikeJenny

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Bond Premium

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									                     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
                       Premium on Bond                                 2,000
    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
Interest Exp                                Premium on Bond
           3,333 332                                      332       2,000
           3,001                                                    1,668
                                Balance Sheet
                                 Dec 31, 2004
                      Bond payable              100,000
                      Add unamortized premium     1,668
                          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
                Unamortized Premium on Bond                1,668
                    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
Interest Exp                                  Premium on Bond
           6,667 668                                       668         1,668
                                                                       1,000
                                Balance Sheet
                               Sept 1, 2005
                   Bond payable                  100,000
                   Add unamortized premium         1,000
                        Carrying value           101,000
If the premium bond is retired at 99 on Sep1, 2005 – show
    all journal entries: Gain = 101,000 -99,000 = 2,000

Sept 1     Bond Payable                 100,000
2005       Premium on Bond                1,000
              Gain on Retirement                    2,000
              Cash                                 99,000

								
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