MUHASEBE II - Deneme Sınavı - 12

A bond arises from a contract known as a bond indenture and represents a promise to pay:

1. a sum of money at a designated maturity rate, plus
2. periodic interest at a specified rate on the maturity amount (face value)

The bond indenture is a contract or loan agreement under which the bonds are issued.

The interest rate written in terms of the bond indenture is known as the stated interest rate. Stated interest rate is also called as coupon or nominal rate.

Secured bonds are backed by a pledge of some collaterals

Bond issues that mature on a single date are called “term bonds”.

Bond Interest Paid = Face Amount of Bonds x Stated Interest Rate

Bonds provide interest rate payments but do not give ownership rights to holders, as they are debt instruments.

Bonds payable, long-term notes payable, mortgages payable, pension liabilities, and lease liabilities can be given as the example to long term liabilities.

A secured bond is a bond for which a company has pledged specific property to ensure its payment. For example, mortgage bonds are secured by a claim on real estate. A mortgage is
a legal claim (lien) on a specific property that gives the bondholder the right to possess the pledged
property if the company fails to make required payments. Bonds not backed by collateral are
called “unsecured bonds” (also called debenture bonds). They are very risky and offer a high-interest rate.

Bonds issued at premium means, the market interest rate is less than the stated interest rate of the bond issued. In other words, since the stated interest rate is more than the interest rate offered by any other investment instrument in the market, investors will pay more than the face value of the bond.

Present Value of the Principal = $100,000 x 0.62092 = $62,092

Present Value of the Interest Payments = $7,000 x 3.79079 = $26,535

Selling Price of the Bond = $62,092 + $26,535 = $88,627

Amortization of a discount increases bond interest expense, amortization of a premium decreases bond interest expense.

The amortization method used for discount or premium is called effective interest method.

Discount amortized = $5000 - ($106,250 x 0,07 x 0,5)
                             = $1246

Bond issues that give the issuer the right to call and retire the bonds prior to maturity are called “callable bonds”.

Accounting for notes and bonds are also similar. Companies, compute the present value of bonds by calculating the present value of its future interest and principal cash flows and amortizes any discount or premium over the life of the note. Inevitably accounting and financial reporting of long term notes payable are quite similar to bonds payable.

Common share is not based on the types of entities but the others are.

Proprietorship is an entity owned by a single owner.

Partnership is an entity owned by two or more owners.