BONDS-PAYABLE

BONDS PAYABLE BONDS ISSUED AT PAR
Bond - represents a promise to pay (1) a sum of money at a designated maturity If the rate employed by the investment community (buyers) is the same as the
date, plus (2) periodic interest at a specified rate on the maturity amount (face stated rate, the bond sell at par. In this case, PAR VALUE = PRESENT VALUE.
value).
Illustration:
The use of bonds provides the issuer an opportunity to divide a large Assume that Santos SA issues R$100,000 in bonds dated January 1, 2022, due in
amount of long-term indebtedness among many small investing units. five years with 9 percent interest payable annually on January 1. At the time of
issue, the market rate for such bonds is 9 percent.
Bonds may be sold through an underwriter who either (a) guarantees a
certain sum to the corporation and assumes the risk of sale or (b) agrees to
sell the bond issue based on a commission.
RATES RATES RATES
Bonds are issued with a stated (coupon or nominal) rate of interest expressed as
a percentage of the face value of the bonds.
But sometimes, the interest rate earned is di4erent from the stated rate.
When bonds are sold for more than face value (at a premium) or less
than face value (at a discount), the interest rate earned by the Enrties for the first year.
bondholder is diAerent from the stated rate. This is known as the
eDective yield or market rate of interest and is set by economic
conditions in the investment market.
The eDective rate exceeds the stated rate when the bonds sell at
a discount, and the eDective rate is less than the stated rate
when the bonds sell at a premium.
How do we compute for the present value of the bonds?

PRESENT VALUE OF THE BONDS = [PV of principal]+[PV of interest payments]
Practice Problem
BONDS ISSUED AT DISCOUNT
When a bond sells at a discount, the proceeds received are less than the face
value of the bond, the amount to be repaid at maturity.
The diDerence, or discount, represents additional interest to be paid on

the bond.
The additional interest increases the interest rate paid on the bond above
the bond’s stated rate, i.e., the eAective-interest rate is greater than the
stated interest rate.
This discount is allocated (amortized) to bond interest expense over the life
of the bond, using the eAective-interest method.
The computation of the discount amortization consists of three steps:

(a) compute bond interest expense by multiplying the carrying value of the
bond at the beginning of the period by the eAective-interest rate;
(b) compute the bond interest paid by multiplying the face value of the
bond by the stated interest rate, and
(c) compute the amortization amount by taking the diAerence between the
bond interest expense amount and the bond interest paid amount. The
amount of the discount amortization is credited to the Bonds Payable
account, increasing the carrying value.
Illustration:
Assume Evermaster AG issued $100,000 of 8 percent term bonds on January
1, 2022, due on January 1, 2027, with interest payable each July 1 and January
1. Because the investors required an eDective interest rate of 10 percent, they
paid $92,278 for the $100,000 of bonds, creating a $7,722 discount.
BONDS ISSUED AT PREMIUM
When a bond sells at a premium, the proceeds received are greater than the face
value of the bond, the amount to be repaid at maturity.
The diAerence, or premium, represents a reduction of interest to be paid
on the bond.
The reduced interest decreases the interest rate paid on the bond below
the bond’s stated rate, i.e., the eAective-interest rate is less than the stated
interest rate.
Illustration:
Assume Evermaster AG issued $100,000 of 8 percent term bonds on January
1, 2022, due on January 1, 2027, with interest payable each July 1 and January
1. Investors are willing to accept an eDective interest rate of 6 percent,
ultimately paying $107,530 or a premium of $8,530.
BETWEEN INTEREST DATES
When bonds are issued between interest dates, the purchase price is increased
by an amount equal to the interest earned on the bonds since the last interest
payment date. On the next interest payment date, the bondholder receives the
entire semiannual interest payment. However, the amount of interest expense to
the issuing corporation is the diAerence between the semiannual interest
payment and the amount of interest prepaid by the purchaser.
When bonds are issued between interest payment dates for a discount or
premium, interest expense is computed from the date of sale, not the date of the
bonds. This means that on the first interest payment date after the sale of the
bonds, the amortization of the discount or premium is based on the number of
months between the date of sale and the interest payment date.
PRACTICE TA
1. On January 1, 2022, the San Antonio Spurs, led by its CEO, Peter Parker, issued
eight-year bonds with a face value of €1,000,000 and a stated interest rate of 6%,
payable semiannually on June 30 and December 31. The bonds were sold to yield
8%.
Compute for: (a) PV Principal (b) PV Interest (c) issue price of the bonds
534,000; 349560; 883,560
2. On January 1, 2022, Hurry Potter Co. sold 12% bonds with a face value of
€600,000. The bonds mature in five years, and interest is paid semiannually on
June 30 and December 31. The bonds were sold for €646,200 to yield 10%. Using
the eAective-interest method of amortization, interest expense for 2022 is
64,436
TN: Everything from this handout is from the book of Kieso, et. al.

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BONDS PAYABLE BONDS ISSUED AT PAR

RATES RATES RATES

How do we compute for the present value of the bonds?

The diDerence, or discount, represents additional interest to be paid on

The computation of the discount amortization consists of three steps:

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