Blueprint Connection: Bonds Payable Bond Rates A bond is a type of note that requires the issuing entity to pay the face value of the bond to the holder when it matures and usually to pay interest at a specified rate. Bonds are liabilities reported on the balance sheet 1. When the market rate is equal to the stated rate, the bonds are sold at face value. 2. When the market rate is greater than the stated rate, bonds will sell for an amount less than their face value. These bonds are said to be sold at a discount . The issuing company must accept an amount less than face value in order to entice investors to purchase bonds with a lower stated rate. Alternatively, when the market rate is less than the stated rate, the amount received by the issuing company is greater than the face value of the bonds. These bonds are said to be sold at a premium Feedback Face Value, Premium, and Discount The discount or premium on bonds payable is recorded in a separate account whose balance is combined with bonds payable on the balance sheet. A discount is a contra-liability account and will be deducted from the bonds payable account. Alternatively, a premium will be added to the bonds payable account. 1. Assume that 8% bonds with a face value of $100,000, due on December 31, 2034 were issued on December 31, 2014. Click on each selling price to see how the selling price affects the balance sheet presentation on the issue date. Selling Price : 1. Assume that 8% bonds with a face value of $100,000, due on December 31, 2034 were issued on December 31, 2014. Click on each selling price to see how the selling price affects the balance sheet presentation on the issue date. Selling Price : $90,000 $100,000 $110,000 2. York Inc. issued bonds on January 1, 2014, that had a two year maturity. The bonds had a face value of $130,000 and a contract rate of interest of 9%, which is paid semiannually on June 30 and December 31. a. Assume that the bond's market rate of interest is 13%, and its current selling price is $121,093. The selling price of the bond is less than the face value of the bonds, which means that these bonds were issued at a discount. When the bond is recorded in the journal, Discount on Bonds Payable should be increased for $ X. The discount will be amortized over the life of the bonds. b. Assume that the bond's market rate of interest is 6%, and its current selling price is $137,249. What amount is recorded as the Premium on Bonds Payable? Feedback The bond pays Interest based on the terms of the bond and the issuer records interest expense based on the actual interest expense after the discount or premium is factored into the amount of interest paid. The discount or premium is amortized over the life of the bond. When a premium amortized, the amortization will be 1. When a discount is amortized, the amortization will be recorded with a(n) decrease to Discount on Bonds Payable recorded with a(n) decrease to Premium on Bonds Payable 2. Fill in the amortization table for each scenario using the effective interest rate method. Roll over the headings for help with the calculations. Enter all amounts as positive numbers. If required, in your computations round the interest expense to the nearest dollar. (Note: Due to rounding issues, some amounts have been provided for you in the tables.) Assume the annual stated rate is 9% and effective rate is 13%. Semi- annual Period Cash Interest Expense Discount on Bonds Payable Discount on Bonds Payable Balance Carrying Value 8,907 121,093 1 5,850 7,871 2,021 6,886 123,114 2 3 2,442 4 2,441 130000 Assume the stated rate is 9% and effective rate is 6%. Premium on Semi- Premium Interest Bonds annual Cash on Bonds Carrying Value Expense Period Payable Payable Balance 7,249 137,249 1 5,850 4,117 1,733 5,516 135,516 2 3 1,893 4 1,893 130,000
