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Chapter 14: 4Q (page 752)

Distinguish between the following values relative to bonds payable:

(a) Maturity value. (c) Market (fair) value.

(b) Face value. (d) Par value.

Short Answer

Expert verified

Maturity value

Value payable at the end of life of the bond.

Face value

The value is established by the bond issuer.

Market value

Present value of all the future cash flows from the bonds.

Par value

Value of each bond as stated by the issuing entity.

Step by step solution

01

Definition of Bonds Payable

Bonds payable can be defined as the security issued by the business entity for generating cash for the business entity. These securities are debt securities.

02

Difference between the values relative to bonds payable

  1. Maturity value: Maturity value can be defined as the value payable to the holder at the end of the bond鈥檚 life. This value can also be stated as the principal value of the bond payable.
  2. Face value: The price of each bond established by the issuer is the face value of the bonds payable. The bonds might be issued at a higher or lower price than the face value.
  3. Market (fair) value: Fair value of the bond can be defined as the present value of the bond calculated using the stream of future cash flow. This value is calculated using the discounted rate.
  4. Par value: Par value can be defined as the value of a bond as stated by the company issuing it. Discount and premium on the bond are calculated using the par value and issued value of the bond payable.

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Most popular questions from this chapter

All of the following are differences between IFRS and GAAP in accounting for liabilities except:

a) When a bond is issued at a discount, GAAP records the discount in a separate contra liability account. IFRS records the bond net of the discount.

b) Under IFRS, bond issuance costs reduce the carrying value of the debt. Under GAAP, these costs are recorded as an asset and amortized to expense over the terms of the bond.

c) GAAP, but not IFRS, uses the term 鈥渢roubled-debt restructurings.鈥�

d) GAAP, but not IFRS, uses the term 鈥減rovisions鈥� for contingent liabilities which are accrued.

Celine Dion company issued $600,000 of 10%, 20- year bonds on January 1, 2017, at 102. Interest is payable semiannually on July 1 and January 1. Dion company uses the straight-line method of amortization for bond premium or discount.

Instructions:

Prepare the journal entries to record the following.

  1. The issuance of the bonds.
  2. The payment of interest and the related amortization on July 1, 2017.
  3. The accrual of interest and the related amortization on December 31, 2017.

On January 1, Patterson Inc. issued \(5,000,000, 9% bonds for \)4,695,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Patterson uses the effective-interest method of amortizing bond discount. At the end of the first year, Patterson should report bonds payable of:

(a) \(4,725,500. (c) \)258,050.

(b) \(4,714,500. (d) \)4,745,000

BE14-2 (L01) The Colson Company issued $300,000 of 10% bonds on January 1, 2017. The bonds are due January 1, 2022, with interest payable each July 1 and January 1. The bonds are issued at face value. Prepare Colson鈥檚 journal entries for (a) the January issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry.

(Entries and Questions for Bond Transactions) On June 30, 2017, Mischa Auer Company issued \(4,000,000 face value of 13%, 20-year bonds at \)4,300,920, a yield of 12%. Auer uses the effective-interest method to amortize bond premium or discount. The bonds pay semi-annual interest on June 30 and -December 31.

Instructions

(Round answers to the nearest cent.)

(a) Prepare the journal entries to record the following transactions.

(1) The issuance of the bonds on June 30, 2017.

(2) The payment of interest and the amortization of the premium on December 31, 2017.

(3) The payment of interest and the amortization of the premium on June 30, 2018.

(4) The payment of interest and the amortization of the premium on December 31, 2018.

(b) Show the proper balance sheet presentation for the liability for bonds payable on the December 31, 2018, balance sheet.

(c) Provide the answers to the following questions.

(1) What amount of interest expense is reported for 2018?

(2) Will the bond interest expense reported in 2018 be the same as, greater than, or less than the amount that would be reported if the straight-line method of amortization were used?

(3) Determine the total cost of borrowing over the life of the bond.

(4) Will the total bond interest expense for the life of the bond be greater than, the same as, or less than the total interest expense if the straight-line method of amortization were used?
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