Page 618 - Accounting Principles (A Business Perspective)

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(see Appendix, Table A.3, 40 period row, 8% column) $ 4,603
Present value of interest: $7,500 x 11.92461
(see Appendix, Table A.4, 40 period row, 8% column) 89,435
Total $94,038
b.
(A) (B) (C) (D) (E)
Interest Bond Cash Credit Discount on Carrying Value
Payment Interest ($100,000 x Bonds Payable of Bonds Payable
Date Expense Debit 0.15 x ½) Credit (previous balance in
(E X 0.16 x ½) (B – C) E + D)
Issued price $94,038
2010/10/31 $7,523 $7,500 $23 94,061
2011/4/30 7,525 7,500 25 94,086
c.
2010
Apr. 30 Cash 94,038
Discount on bonds payable 5,962
Bonds payable 100,000
Issued $100,000 face value of 20-year, 15% bonds to
yield 16%.

Oct. 31 Bond interest expense 7,523
Discount on bonds payable 23
Cash 7,500
Paid semiannual bond interest expense.

Dec. 31 Bond interest expense ($7,525 x (1/3)) 2,508
Discount on bonds payable 8
Bond interest payable ($7,500 x (1/3)) 2,500
To record accrual of two months' interest expense.

2011
Apr. 30 Bond interest payable 2,500
Bond interest expense ($7,525 x (2/3)) 5,017
Discount on bonds payable 17
cash 7,500
Paid semiannual bond interest expense.
Key terms
Annuity A series of equal cash flows spaced in time.
Bearer bond See unregistered bond.
Bond A long-term debt, or liability, owed by its issuer. A bond certificate, a negotiable instrument, is the
formal, physical evidence of the debt owed.
Bond indenture The contract or loan agreement under which bonds are issued.
Bond redemption (or sinking) fund A fund used to bring about the gradual redemption of a bond issue.
Callable bond A bond that gives the issuer the right to call (buy back) the bond before its maturity date.
Call premium The price paid in excess of face value that the issuer of bonds must pay to redeem (call)
bonds before their maturity date.
Carrying value (of bonds) The face value of bonds minus any unamortized discount or plus any
unamortized premium. Sometimes referred to as net liability on the bonds.
Compound interest Interest calculated on the principal and on interest of prior periods.
Contract rate of interest The interest rate printed on the bond certificates and specified on the bond
indenture; also called the stated, coupon, or nominal rate.
Convertible bond A bond that may be exchanged for shares of stock of the issuing corporation at the
bondholders' option.
Coupon bond A bond not registered as to interest; it carries detachable coupons that are to be clipped and
presented for payment of interest due.
Debenture bond An unsecured bond backed only by the general creditworthiness of its issuer.
Discount (on bonds) Amount a bond sells for below its face value.

Accounting Principles: A Business Perspective 619 A Global Text