Page 593 - Accounting Principles (A Business Perspective)

15. Long-term financing: Bonds

preparation and interpretation, accountants are some of the most sought after professionals for understanding the
financial position and risk of a prospective borrower.
In previous chapters, you learned that corporations obtain cash for recurring business operations from stock

issuances, profitable operations, and short-term borrowing (current liabilities). However, when situations arise that
require large amounts of cash, such as the purchase of a building, corporations also raise cash from long-term
borrowing, that is, by issuing bonds. The issuing of bonds results in a Bonds Payable account.
Bonds payable

A bond is a long-term debt, or liability, owed by its issuer. Physical evidence of the debt lies in a negotiable
bond certificate. In contrast to long-term notes, which usually mature in 10 years or less, bond maturities often run
for 20 years or more.
Generally, a bond issue consists of a large number of USD 1,000 bonds rather than one large bond. For example,
a company seeking to borrow USD 100,000 would issue one hundred USD 1,000 bonds rather than one USD
100,000 bond. This practice enables investors with less cash to invest to purchase some of the bonds.

Bonds derive their value primarily from two promises made by the borrower to the lender or bondholder. The
borrower promises to pay (1) the face value or principal amount of the bond on a specific maturity date in the
future and (2) periodic interest at a specified rate on face value at stated dates, usually semiannually, until the
maturity date.
Large companies often have numerous long-term notes and bond issues outstanding at any one time. The
various issues generally have different stated interest rates and mature at different points in the future. Companies
present this information in the footnotes to their financial statements. Exhibit 117 shows a portion of the long-term

borrowings footnote from Dow Chemical Company's 2000 annual report. Promissory notes, debenture bonds, and
foreign bonds are shown, with their amounts, maturity dates, and interest rates.
Promissory notes and debentures at 2000 December 31
Millions
2000 1999
6.95%, final maturity 2002 $ 346 $ ---
7.81%, final maturity 2002 ---
7.13%, final maturity 2003
7.00%, final maturity 2005 300 ---
7.70%, final maturity 2006 2,473 2,448
Subtotal $3,267 $3,135

Foreign bonds at 2000 December 31 Millions
2000 1999
4.63%, final maturity 2000, Swiss Fran $-- $ 95
6.38%, final maturity 2001, Japanese Yen 218 244
5.00%, final maturity 2003, Euro 139 151
Subtotal $357 $490
Exhibit 117: Dow chemical company's long-term notes and bonds (in millions)
Comparison with stock

A bond differs from a share of stock in several ways:
• A bond is a debt or liability of the issuer, while a share of stock is a unit of ownership.
• A bond has a maturity date when it must be paid. A share of stock does not mature; stock remains
outstanding indefinitely unless the company decides to retire it.

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