Bonds
Payable and Other Long Term Liabilities
Quick
Study Sheet
Bonds Payable– borrow from investors who invest in the bond to earn interest income
Maturity Value: Amount that must be repaid (usually in $1,000s)
Maturity Date: Date the maturity value amount must be repaid
Stated Interest Rate: “Coupon” – amount paid as interest, periodically
Market Yield/Effective interest rate: The interest expense the company really incurs,
Regardless of what is paid at the beginning, the face value must be paid at maturity date
Discount: Cash exchanged is less than face value
Premium: Cash exchanged is more than face value
Determining the price of the bond:
A bond that trades at 98 means: 98% (.98) x the maturity value invested in = price
If the bond price is not stated, it can be calculated using the effective interest rate,
the number of periods until maturity, and the coupon rate.
Total periodic coupon payment** x present value factor of an annuity
+
Maturity value x present value factor of a single amount
= Amount paid now to get the effective interest rate return on your money
Journal
Entries related to the bond payable:
Cash
Interest Expense
Discount/Premium
Premium/Discount
Bonds Payable Cash
Amortization
Table:
Effective Coupon Discount
or Amount owed-
Interest
Exp. - Interest = Difference
Premium + / - "Carrying
value"
"Yield %"
"Stated %" or
Begin with the price
"Market
%" "coupon %" of the bond - the
cash
exchanged
x the last x MV
amount owed (same for
End at MV
all
periods)
Long
- Term Installment Loans / Notes Payable / Mortgage Payable:
Borrow
money from bank, must repay periodically in equal payments.
The payments must cover interest expense
and repayment of principle
Difference: Amount Owed
Payment Interest 10 % to repay principle (Carrying
value)
Journal
entries:
Borrow:
Payments
Cash
Interest Expense
Note Payable Note
Payable
Cash
