ACTG 211 Lecture 9: ACTG 211 – Lecture 9
30 May 2018
School
Department
Course
Professor
Accounting 211 – Lecture 9 – Reporting and Analyzing
Long-Term Liabilities
Advantages of Bonds
• Bonds do not affect owner control
• Interest on bonds is tax deductible
• Bonds can increase return on equity
Disadvantages of Bonds
• Bonds require payments of both periodic interest and par value at maturity
• Bonds can decrease return on equity when the company pays more in interest than it
earns on the borrowed funds
Bond-Issuing Procedures
• A company can sell the bonds to investors
• An investment firm called underwriter, resells the bonds to investors
• A trustee monitors the bond issue
Basics of Bonds
• Corporation → Bond Interest Payments → Investors
• Interest payment = Bond Par Value x Contract Interest Rate x Time
Issuing Bonds at Par
- King Co. issues the following bonds on January 1, 2013
o Par Value = $1,000,000
o Stated Interest Rate = 10%
o Interest Dates = 6/30 and 12/31
o Bond Date = Jan. 1 2013
o Maturity Date = Dec. 31, 2032 (20 years)
▪ Cash 1,000,000
• Bonds Payable 1,000,000
- On Dec. 31, 2032, when the bonds mature, King Co. makes the following entry
▪ Bonds Payable 1,000,000
• Cash 1,000,000
o The debt has now been extinguished
Interest Expense on Bonds at Par
- The entry on June 30, 2013, to record the first semiannual interest payment is…
o Bond Interest Expense 50,000
▪ Cash 50,000
Document Summary
Accounting 211 lecture 9 reporting and analyzing. Advantages of bonds: bonds do not affect owner control. Interest on bonds is tax deductible: bonds can increase return on equity. Disadvantages of bonds: bonds require payments of both periodic interest and par value at maturity, bonds can decrease return on equity when the company pays more in interest than it earns on the borrowed funds. Bond-issuing procedures: a company can sell the bonds to investors, an investment firm called underwriter, resells the bonds to investors, a trustee monitors the bond issue. Basics of bonds: corporation bond interest payments investors. Interest payment = bond par value x contract interest rate x time. On dec. 31, 2032, when the bonds mature, king co. makes the following entry: bonds payable. 1,000,000: bonds payable, cash, the debt has now been extinguished. The entry on june 30, 2013, to record the first semiannual interest payment is : bond interest expense, cash.
