2. Issuing procedures.
tractual interest rate.
b. The terms of the bond issue are set forth in a legal document called
of the issuing company.
3. Determining the market value of bonds.
a. Present value is the amount that must be invested today at a given
interest rate to have a specified sum of money at a specified date.
b. The present value of a bond is the value at which it should sell in
the marketplace. Market value is a function of the three factors that
determine present value:
(1) The dollar amounts to be received.
(2) The length of time until the amounts are received.
(3) The market rate of interest.
D. Issuing Bonds at Face Value.
a credit to Cash.
3. The entry to accrue bond interest includes a debit to Interest Expense and a
credit to Interest Payable.
E. Issuing Bonds at a Discount or Premium.
3. The entry to record bonds issued at a discount includes a debit to Cash
deducted from Bonds Payable on the balance sheet.
bonds.
4. The entry to record bonds issued at a premium includes a debit to Cash
amount on the balance sheet.
the life of the bonds.
F. Redeeming Bonds Before Maturity.
2. When a company retires bonds before maturity, it is necessary to:
a. Eliminate the carrying value of the bonds at the redemption date.
b. Record the cash paid.
c. Recognize the gain or loss on redemption.
G. Converting Bonds into Common Stock.
of interest than nonconvertible bonds.
2. When the issuing company records a conversion, the company ignores
the current market prices of the bonds and stock. The company transfers
or loss is recognized.
H. Accounting for Long-Term Notes Payable.
1. Long-term notes payable are similar to short-term interest-bearing notes
I. Statement Presentation and Analysis.
1. Companies should report the nature and amount of each long-term debt in
as collateral) shown in a supporting schedule.
3. Companies report the current maturities of long-term debt under current
4. The long-run solvency of a company may be analyzed by computing the
debt to assets ratio and times interest earned.
a. The debt to assets ratio measures the percentage of the total
assets provided by creditors. It is computed by dividing total
liabilities by total assets.
b. Times interest earned indicates the company’s ability to meet interest
payments as they come due. It is computed by dividing income before
income taxes and interest expense by interest expense.
INVESTOR INSIGHT
In many corporate loans the lending agreement specifies debt covenants—
specific financial measures that a company must maintain during the life of the
loan. Covenants protect lenders because they enable lenders to step in and try to
get their money back before the borrower gets too deep into trouble.
How can financial ratios such as those covered in this chapter provide protection
for creditors?
*J. Present Value of Face Value.
formula:
PV = FA ÷ (1 + i)n
FA = future amount; i = interest rate; n = number of periods.
Copyright © 2014 John Wiley & Sons, Inc. Weygandt, Financial Accounting, 9/e, Instructor’s Manual (For Instructor Use Only) 10–15
3. Another way to compute the present value of a single future amount is to
use Table 10A-1, which shows the present value of 1 for n periods.
4. Using Table 1, the present value of a single future amount is computed by
multiplying the future amount by the appropriate present value of
1 factor.
*K. Present Value of Interest Payments (Annuities).
1. The present value of an annuity is the value today of a series of future
amounts to be received (or paid), assuming compound interest.
2. In order to compute the present value of an annuity, one needs to know the:
a. interest rate.
b. number of interest periods.
given number of periods.
*L. Computing the Present Value of a Bond.
1. The present value (or market price) of a bond is a function of the:
a. payment amounts.
b. length of time until the amounts are paid.
c. interest (discount) rate.
3. To compute the present value of the bond, one must discount both
the interest payments and the principal amount.
from Table 10A–1.
b. Multiply the amount of the interest payments by the appropriate present
value factor from Table 10A–2.
c. Add the present value of the principal amount to the present value
of the interest payments to determine the present value of the bond.
*M. Effective-Interest Method of Bond Amortization.
panies compute:
a. bond interest expense by multiplying the carrying value of the bonds
at the beginning of the interest period by the effective-interest rate.
b. the bond discount or premium amortization by determining the differ–
ence between the bond interest expense and the bond interest paid.
effective-interest method.
*N. Straight-Line Amortization.
1. The straight-line method of amortization results in a constant amount of
amortization and interest expense per period.