ScienceEconomicsAccounting 1 Ch 14 Exam 3
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Accounting 1 Ch 14 Exam 3

Brooklynn White avatar Brooklynn White
19 March 2023
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bond
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issuer's written promise to pay an amount equaling the par value of the bond with interest
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par value of a bond
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the value of a bond at its maturity; what the issuer promises to pay the bondholder when the bond matures
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advantages of bonds
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1. bonds do not affect owner control 2. interest on bonds is tax deductible 3. bonds can increase return on equity
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disadvantages of bonds
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1. bonds can decrease return on equity 2. bonds require payment of both periodic interest and the par value at maturity
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bond indenture
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a legal document describing the rights and obligations of both the bondholders and issuer
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bond certficate
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includes issuer's name, the par value, the contract issue rate, and the maturity date
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Bond Interest formula
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% X par value X fraction of year
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contract rate (stated rate)
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interest found by mutliplying par value by stated rate
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market rate of interest
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the rate that borrowers are willing to pay and lenders are willing to accept for a particular bond and its risk level
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Issuing Bonds at a Discount
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par value exceeds bond price
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discount on bonds payable
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contract rate is less than market rate (contra liability account)
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recording issuance of discount bonds
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dr. cash dr. discount bonds payable cr. bonds payable
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straight line bond amortization
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total bond interest/number of pay periods
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Carrying (book) value of bonds
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Net amount at which bonds are reported on the balance sheet; equals the par value of the bonds less any unamortized discount or plus any unamortized premium; also called carrying amount or book value.
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Issuing Bonds at a Premium
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bond price exceeds par value
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recording issuance of premium bonds
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dr. cash cr. premium on bonds payable cr. bonds payable
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premium on bonds payable
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added to long term liabilities
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amortizing premium bonds
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decreases the recorded amount of interest expense step 1. find total interest step 2. subtract premium step 3. divide by pay periods to find amortized amount for each period
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Amortizing the discount on bonds payable
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increases the recorded amount of interest expense step 1. find total interest step 2. add the discount step 3. divide by pay periods to find amortized amount for each period
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bond retirement at maturity
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The carrying value of bonds at maturity always equals par value.
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bond retirement before maturity
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carrying value>retirement price=gain carrying value
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bond retirement by conversion
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bond's carrying value is transferred to equity accounts and no gain or loss is recorded
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installment note
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Liability requiring a series of periodic payments to the lender. principle X present day factor= yearly payment remaining balance X yearly interest rate= interest payment principle-yearly payments + interest payments= remaining balance
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mortgage
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legal agreement that helps protect a lender if a borrower fails to make required payments on notes or bonds
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Present Value Factor
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present value factor X dollar amount =present value
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secured bonds
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Bonds that have specific assets of the issuer pledged as collateral.
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unsecured bonds
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bonds issued against the general credit of the borrower
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Debt to Equity Ratio
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total liabilities/total equity