LO9–4 Account for the issuance of bonds at face amount.

1. What is a bond?

A formal debt instrument issued by a company to borrow money.

What does the issuing company receive when it issues a bond?

Cash from investors.

What does the company promise to pay bond investors?

Periodic interest + the face amount at maturity.

What is the face amount (principal)?

The amount repaid at maturity.

How often do most corporate bonds pay interest?

Semiannually (every 6 months).

How do you calculate semiannual interest?

Face amount × stated rate × 1/2

Journal entry to issue bonds at face value:

Debit Cash

Credit Bonds Payable

Journal entry to record semiannual interest:

Debit Interest Expense

Credit Cash

When bonds are within 1 year of maturity, how are they classified?

Current liabilities.

Journal entry to retire bonds at maturity:

Debit Bonds Payable

Credit Cash

What are secured bonds?

• Backed by collateral (assets the company promises).

• If the company doesn’t pay → investor can take the asset.

• Example: A bond backed by a building.

What are unsecured bonds (debentures)?

• NOT backed by any specific asset.

• Only backed by the company’s “promise.”

• Most corporate bonds are unsecured.

What are term bonds?

• Entire principal is paid back on ONE date.

• Example: $100,000 due all at once in 10 years.

• Companies often save money in a sinking fund to prepare.

• One big payment

What are serial bonds?

• Principal is paid back in chunks over several years.

• Example: $20 million bond → $2 million paid each year for 10 years.

• Mature in installments

• Multiple smaller payments

What are callable bonds?

• Bonds the issuer can repay early at a set price.

• Company can pay off the bond early if it wants.

• Usually pays a little extra (call price).

• Companies do this when interest rates drop.

• Issuing company can pay off bonds early.

• I borrowed money from you, but I’m allowed to pay you back early and end the deal.

Callable = “I can cancel this bond early if it benefits me.”

Converstible bonds

• Investor can convert the bond into shares of stock.

• Example: $1,000 bond → can convert into 20 shares.

• If stock price rises, investor benefits.

Convertible = “Bond that can turn into stock.”