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Bonds Payable and Other Long Term Liabilities

1) Key Things To Know 5) Medium Practice Test
2) Self Test 6) Hard Practice Test
3) Practice as You Learn 7) On Your Test
4) Easy Practice Test 8) Quick Study Sheet

 

 

Quick Study Sheet

 

Bonds Payable–  borrow from investors who invest in the bond to earn interest income
            Maturity Value:                        Amount that must be repaid (usually in $1,000s)
            Maturity Date:                         Date the maturity value amount must be repaid
            Stated Interest Rate:               “Coupon” – amount paid as interest, periodically
            Market Yield/Effective interest rate:  The interest expense the company really incurs,
 
Regardless of what is paid at the beginning, the face value must be paid at maturity date
            Discount:    Cash exchanged is less than face value   

            Premium:    Cash exchanged is more than face value 

Determining the price of the bond:

A bond that trades at 98 means:  98% (.98) x the maturity value invested in = price
 
If the bond price is not stated, it can be calculated using the effective interest rate,
     the number of periods until maturity, and the coupon rate.
 
                Total periodic coupon payment**   x   present value factor of an annuity
            +  Maturity value   x     present value factor of a single amount
            = Amount paid now to get the effective interest rate return on your money
 

Journal Entries related to the bond payable:

Cash                                                    Interest Expense 
                   Discount/Premium                             Premium/Discount                
                            Bonds Payable                                  Cash

 

Amortization Table:

 Effective              Coupon                                   Discount or                    Amount owed-
Interest Exp.   -   Interest        =   Difference       Premium        + / -        "Carrying value"                                                                                    
   "Yield %"          "Stated %" or                                                                Begin with the price
   "Market %"        "coupon %"                                                                    of the bond - the                                                                                                                    cash exchanged
   x the last                   x MV
   amount owed    (same for                                                                           End at MV                                 all periods)

 

Long - Term Installment Loans / Notes Payable / Mortgage Payable:

Borrow money from bank, must repay periodically in equal payments.
            The payments must cover interest expense and repayment of principle

                                                                                      Difference:                      Amount Owed
                            Payment           Interest 10 %        to repay principle             (Carrying value)

  Journal entries:

 Borrow:                            Payments                          

  Cash                                Interest Expense
            Note Payable              Note Payable
                                                      Cash         


 

 

 

 
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