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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

What is the fair value option? Briefly describe the controversy of applying the fair value option to financial liabilities.

What are the two methods of amortizing discount and premium on bonds payable? Explain each.

E14-1 (L01) (Classification of Liabilities) Presented below are various account balances of K.D. Lang Inc.

(a) Unamortized premium on bonds payable, of which \(3,000 will be amortized during the next year.

(b) Bank loans payable of a winery, due March 10, 2021. (The product requires aging for 5 years before sale.)

(c) Serial bonds payable, \)1,000,000, of which \(200,000 are due each July 31.

(d) Amounts withheld from employees鈥� wages for income taxes.

(e) Notes payable due January 15, 2020.

(f) Credit balances in customers鈥� accounts arising from returns and allowances after collection in full of account.

(g) Bonds payable of \)2,000,000 maturing June 30, 2018.

(h) Overdraft of $1,000 in a bank account. (No other balances are carried at this bank.)

(i) Deposits made by customers who have ordered goods.

Instructions

Indicate whether each of the items above should be classified on December 31, 2017, as a current liability, a long-term liability, or under some other classification. Consider each one independently from all others; that is, do not assume that all of them relate to one particular business. If the classification of some of the items is doubtful, explain why in each case.

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.

Determine Proper Amounts in Account Balances) Presented below are two independent situations.

(a) George Gershwin Co. sold \(2,000,000 of 10%, 10-year bonds at 104 on January 1, 2017. The bonds were dated January 1, 2017, and pay interest on July 1 and January 1. If Gershwin uses the straight-line method to amortize bond premium or discount, determine the amount of interest expense to be reported on July 1, 2017, and December 31, 2017.

(b) Ron Kenoly Inc. issued \)600,000 of 9%, 10-year bonds on June 30, 2017, for $562,500. This price provided a yield of 10% on the bonds. Interest is payable semiannually on December 31 and June 30. If Kenoly uses the effective interest method, determine the amount of interest expense to record if financial statements are issued on October 31, 2017.
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