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Bond Liabilities

Bond Liabilities. Significant debt needs of a company are often filled by issuing bonds. Bonds. Cash. Bond Liabilities. Bonds involve the long-term borrowing of a large sum of money. At maturity, the principal (or face value) is paid back as a lump sum.

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Bond Liabilities

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  1. Bond Liabilities Significant debt needs of a company are often filled by issuingbonds. Bonds Cash

  2. Bond Liabilities • Bonds involve the long-term borrowing of a large sum of money. • At maturity, the principal (or face value) is paid back as a lump sum. • Individual bonds are often denominated with a face value, of $1,000. • The Selling price of a bond is ‘stated’ as a percentage of its face value (e.g., a $1,000 face value bond selling at 96% would have a current selling price of $960)

  3. Bond Liabilities • Bonds usually have periodic interest payments based on a stated rate of interest. • Interest is normally paid semiannually. • Cash Interest paid is computed as: Interest = Principal × Stated Rate × Time • Bond prices are usually quoted as a percentage of the face amount. For example, a $1,000 bond priced at 104 would sell for $1,040.

  4. Bond Liabilities Bond Selling Price Bond Certificate at Face Value Corporation Investors Bond Issue Date

  5. Bond Liabilities Bond Interest Payments Corporation Investors Bond Interest Payments Interest Payment = Principal × Interest Rate × Time Bond Issue Date

  6. Bond Liabilities Bond Principal at Maturity Date Corporation Investors Bond Issue Date Bond Maturity Date

  7. Bond Liabilities • Advantages of bonds • Bonds usually have longer terms to maturity than notes payable issued to banks. • Bond interest rates are usually lower than bank loan rates.

  8. Bonds Issued at Face Value Blair Company issues bonds on January 1, 2005. Principal = $1,000,000 Stated (“CASH”) Interest Rate = 9% Interest Dates = 6/30 and 12/31 Maturity Date = Dec. 31, 2024 (20 years) Bond Selling Price Bond Certificate at Face Value Blair Company Investors

  9. To record the bond issue, Blair Company wouldmake the following entry on January 1, 2005: Bonds Issued at Face Value Issuing the bonds has the following effecton Blair’s 2005 financial statements:

  10. Bonds Issued at Face Value On each interest payment date, Blair Company will pay $45,000 in interest. The amount is computed as follows: $1,000, 000 × 9% × 6/12 = $45,000 Bond Interest Payments Blair Company Investors

  11. To record an interest payment, Blair Company would makethe following entry on each June 30 and December 31: Bonds Issued at Face Value The June 30, 2005 interest payment (and all other semiannual interestpayments) has the following effect on Blair’s financial statements:

  12. Bonds Issued at Face Value On December 31, 2024, Blair Company will return the $1,000,000 principal amount to the investors. Bond Principal at Maturity Date Blair Company Investors

  13. To record an the principal repayment, Blair Company would makethe following entry on December 31, 2024: Bonds Issued at Face Value The principal repayment on December 31, 2024 will have thefollowing effect on Blair’s 2024 financial statements:

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