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.
Solution to demonstration problem
a.
| Price received: | ||
| Present value of principal: $100,000 x 0.04603 (see Appendix, Table A.3, 40 period row, 8% column) |
$ 4,603 |
|
| Present value of interest: $7,500 x 11.92461 (see Appendix, Table A.4, 40 period row, 8% column) |
89,435 |
|
| Total | $94,038 |
b.
| (A) | (B) | (C) | (D) | (E) |
| Interest Payment Date |
Bond Interest Expense Debit (E x 0.16 x ½) |
Cash credit ($100,000 x 0.15 x ½) |
Discount on Bonds Payable Credit (B-C) |
Carrying value of Bonds Payable (previous balance in E+D) |
| Issued Price | $94,038 | |||
| 2010/10/31 | $7,523 | $7,500 | $23 | 94,061 |
| 2011/4/30 | 7,525 | 7,500 | 25 | 94,086 |
|
2010 Apr. 30 |
Cash |
94,038 |
| Discount on bonds payable | 5,962 | |
| Bonds payable | 100,000 | |
| Issued $100,000 face value of 20-year, 15% bonds to yield 16%. | ||
| Oct. 31 |
Bond interest expense |
7,523 |
| Discount on bonds payable | 23 | |
| Cash | 7,500 | |
| Paid semiannual bond interest expense | ||
| Dec. 31 | Bond interest expense ($7,525 x (1/3)) |
2,508 |
| Discount on bonds payable | 8 | |
| Bond interest payable ($7,500 x (1/3)) | 2,500 | |
| To record accrual of two months' interest expense | ||
| To record accrual of two months' interest expense. |
|
2011 Apr. 30 |
Bond interest payable |
2,500 |
| Bond interest expense ($7,525 x (2/3)) | 5,017 | |
| Discount on bonds payable | 17 | |
| Cash | 7,500 | |
| Paid semiannual bond interest expense. |