1. Explanation of the bond’s issue price (resource: chapter 14 book ‘Fundamental Accounting Principles’, by Wild, Shaw, and Chiapetta, 2009, 19th edition McGrawhill)

2. Definition bond A bond is its issuer’s written promise to pay an amount identified as the par value of the bond and interest at a stated annual rate.

3. Bond Discount or Premium Bond Sets Market Sets ContractRate MarketRate Contract rate > Market rate Bonds sell at Premium Contract rate = Market rate Bonds sell at Par Contract rate < Market rate Bonds sell at Discount

4. Issuing Bonds at Par A company is authorized to issue the following bonds on January 1, 2009: Par Value = $800,000 Stated Interest Rate = 9% (= annual) Interest Dates = 6/30 and 12/31 (= semi-annual) Bond Date = Jan. 1, 2009 Maturity Date = Dec. 31, 2028 (20 years)

5. Issuing Bonds at Par On June 30, 2009, to record the first semiannual interest payment is . . . $800,000 × 9% × ½ year = $36,000This entry is made every six months until the bonds mature.

6. Issuing Bonds at a Discount Par Value = $100,000Issue Price = 96.454% of par valueStated Interest Rate = 8%Market Interest Rate = 10%Interest Dates = 6/30 and 12/31Bond Date = Jan. 1, 2009 Maturity Date = Dec. 31, 2010 (2 years) } Bond will sell at a discount.

7. Issuing Bonds at a Discount On Jan. 1, 2009, the journal entry for the bond issue Contra-Liability Account

8. Issuing Bonds at a Discount Maturity Value Carrying Value Amortizing a Bond DiscountUsing the straight-line method, the discount amortization will be $887(rounded) every six months. $3,546 ÷ 4 periods = $887(rounded)

9. Amortizing a Bond Discount The discount will be amortized over the bond’s lifetime. Every every six months there will be an entry to record the cash interest payment and the amortization of the discount. $3,546 ÷ 4 periods = $887 (rounded) $100,000 × 8% × ½ = $4,000

10. Amortizing a Bond Discount

11. Issuing Bonds at a Premium Par Value = $100,000Issue Price = 103.546% of par valueStated Interest Rate = 12%Market Interest Rate = 10%Interest Dates = 6/30 and 12/31Bond Date = Jan. 1, 2009 Maturity Date = Dec. 31, 2010 (2 years) } Bond will sell at a premium.

12. Issuing Bonds at a Premium Journal entry Jan. 1, 2009 for the bond issue Adjunct-Liability Account

13. Issuing Bonds at a Premium Maturity Value Carrying Value Amortizing a Bond PremiumUsing the straight-line method, the premium amortization will be $887(rounded) every six months. $3,546 ÷ 4 periods = $887(rounded)

14. Amortizing a Bond Premium The premium will be amortized over the bond’s life. Every six months there will be a journal entry to record the cash interest payment and the amortization of the discount. $3,546 ÷ 4 periods = $887 (rounded) $100,000 × 12% × ½ = $6,000

15. Amortizing a Bond Premium

16. Points to remember Compare stated rate with the market rate to determine if the bond issues at par, below par or above par. If the bond issues at par there are only TWO accounts (cash and bonds payable) If the bond issues below par there are THREE accounts (cash, discount and bonds payable) If the bonds issues above par there are THREE accounts (cash, bonds payable, premium)