Long-Term Financing: Bonds

A company can purchase bonds as an investment or can issue bonds as a mechanism to raise capital. It is important to understand the different types of bond issues that a company can use, and the impact of interest rates on those bonds. After this reading, you will be able to explain how a company can use long-term bonds as part of their capital budget.

Demonstration problem

Jackson Company issued USD 100,000 face value of 15 per cent, 20-year junk bonds on 2010 April 30. The bonds are dated 2010 April 30, call for semiannual interest payments on April 30 and October 31, and are issued to yield 16 per cent (8 per cent per period).

a. Compute the amount received for the bonds.

b. Prepare an amortization schedule. Enter data in the schedule for only the first two interest periods. Use the effective interest rate method.

c. Prepare journal entries to record issuance of the bonds, the first six months' interest expense on the bonds, the adjustment needed on 2010 December 31 (assuming Jackson's accounting year ends on that date), and the second six months' interest expense on 2011 April 30.