Bonds
a form of interest-bearing notes payable issued by corporations, universities, and governmental agencies. sold in small denominations.
Bondholder
investing in bonds, lending the money
Types of Bonds
secured, unsecured, convertible, callable
Issuing Procedures
Bond Certificate, Face Value, Maturity Date, Contractual Interest Rate
Bond Certificate
issued to the investor, provides name of the company issuing bonds, face value, maturity date, and contractual (stated) interest rate
Face Value
principal due at the maturity
Maturity Date
date final payment is due
Contractual Interest Rate
rate to determine cash interest paid, generally semiannually
Determining the Market Value of Bonds
Current market price (present value) of a bond is a function of three factors: 1) the dollar amounts to be received, 2) the length of time until the amounts are received, and 3) the market rate of interest
A corporation records bond transactions when it
issues or retires (buys back) bonds and when bondholders convert bonds into common stock
Bonds may be issued at
face value, below face value (discount) or above face value (premium) they are quoted as a percentage of face value
Sales of bonds below face value
causes the total cost of borrowing to be more than the bond interest paid. the borrower is required to pay the bond discount at the maturity date thus the bond discount is considered to be a increase in the cost of borrowing
Sale of bonds above face value
causes the total cost of borrowing to be less than the bond interest paid, borrower is not required to pay the bond premium at the maturity date of the bonds. thus the bond premium is considered to be a reduction in the cost of borrowing
Off-Balance-Sheet Financing
Contingencies, Leasing: operating and capital leases
Amortizing Bond Discount
to follow the expense recognition principle, companies allocate bond discount to expense in each period in which the bonds are outstanding. [Bond Discount Amortization = Bond discount / number of interest periods]
Effective Interest Method
amortization of the discount or premium results in interest expense equal to a constant percentage of the carrying value. 1. Compute the bond interest expense. 2. compute the bond interest paid or accrued 3. compute the amortization amount.
Amortization Amount
Bond Interest Expense (Carrying value of bonds at beginning of period x effective interest rate) - Bond Interest Paid (Face value of bond x contractual interest rate)
Current Liability
1) company expects to pay the debt from existing current assets or through the creation of other current liabilities. 2) company will pay the debt within one year or the operating cycle whichever is longer
Notes Payable
written promissory note, usually require the borrower to pay interest, those due within one year of the balance sheet date are usually classified as current liabilities
Sales Tax Payable
Sales taxes are expressed as a stated percentage of the sales price, selling company: collects tax from the customer, remits the collections t the state's department of revenue
Unearned Revenue
Revenues that are received before the company delivers goods or provides service.
1. company debits cash and credits a current liability account (unearned revenue). 2. When the company earns the revenue it debits the unearned revenue account and credits a
Current Maturities of Long-Term Debt
portion of long-term debt that comes due in the current year. no adjusting entry required
Payroll and Payroll Taxes Payable
the term payroll pertains to both: salaries and wages
Salaries
managerial, administrative, and sales personnel (monthly or yearly rate)
Wages
store clerks, factory employees, and manual laborers (rate per hour)
Determining Payroll
1) Gross Earnings, 2) payroll deductions, and 3) net pay
Payroll Tax Expense
results from 3 taxes that governmental agencies levy on employers. (FICA tax, federal unemployment tax, state unemployment tax