C13 - 1
Learning Objectives
Power Notes
1,Financing Corporations
2,Characteristics of Bonds Payable
3,The Present-Value Concept and Bonds Payable
4,Accounting for Bonds Payable
5,Bond Sinking Funds
6,Bond Redemption
7,Investments in Bonds
8,Corporation Balance Sheet
9,Financial Analysis and Interpretation
Chapter F13
C13
Bonds Payable and Investments in Bonds
C13 - 2
Long-Term Financing
Characteristics of Bonds Payable
Time Value of Money
Issuing Bonds Payable
Redemption of Bonds Payable
Investments in Bonds
Number of Times Interest Earned
Slide # Power Note Topics
3
9
17
28
34
35
36
Note,To select a topic,type the slide # and press Enter.
Power NotesChapter F13
Bonds Payable and Investments in Bonds
C13 - 3
Two Methods of Long-Term Financing
Resources = Sources
Stockholders’
Equity
Assets
Liabilities
C13 - 4
Two Methods of Long-Term Financing
Resources = Sources
Stockholders’
Equity
Assets
Liabilities
Equity Financing – Stockholders
C13 - 5
Two Methods of Long-Term Financing
Resources = Sources
Stockholders’
Equity
Assets
Liabilities
Bondholders
Equity Financing – Stockholders
Debt Financing – Bondholders
C13 - 6
Two Methods of Financing
Bondholders
Bonds (debt) – Interest payments to bondholders
are an expense that reduces taxable income.
Stock (equity) – Dividend payments are made from
after tax net income and retained earnings,
Earnings per share on common stock can often
be increased by issuing bonds rather than
additional stock.
Why issue bonds rather than stock?
Stockholders
C13 - 7
Alternative Financing Plans – $800,000 Earnings
Plan 1 Plan 2 Plan 3
12 % bonds — — $2,000,000
Preferred 9% stock,$50 par — $2,000,000 1,000,000
Common stock,$10 par $4,000,000 2,000,000 1,000,000
Total $4,000,000 $4,000,000 $4,000,000
Earnings before interest
and income tax $ 800,000 $ 800,000 $ 800,000
Deduct interest on bonds — — 240,000
Income before income tax $ 800,000 $ 800,000 $ 560,000
Deduct income tax 320,000 320,000 224,000
Net income $ 480,000 $ 480,000 $ 336,000
Dividends on preferred stock — 180,000 90,000
Available for dividends $ 480,000 $ 300,000 $ 246,000
Shares of common stock400,000200,000100,000
Earnings per share $ 1.20 $ 1.50 $ 2.46
C13 - 8
Alternative Financing Plans – $440,000 Earnings
Plan 1 Plan 2 Plan 3
12 % bonds — — $2,000,000
Preferred 9% stock,$50 par — $2,000,000 1,000,000
Common stock,$10 par $4,000,000 2,000,000 1,000,000
Total $4,000,000 $4,000,000 $4,000,000
Earnings before interest
and income tax $ 440,000 $ 440,000 $ 440,000
Deduct interest on bonds — — 240,000
Income before income tax $ 440,000 $ 440,000 $ 200,000
Deduct income tax 176,000 176,000 80,000
Net income $ 264,000 $ 264,000 $ 120,000
Dividends on preferred stock — 180,000 90,000
Available for dividends $ 264,000 $ 84,000 $ 30,000
Shares of common stock400,000200,000100,000
Earnings per share $ 0.66 $ 0.42 $ 0.30
C13 - 9
Characteristics of Bonds Payable
Long-term debt – repayable 10,20,or 30 years
after date of issuance.
Issued in face (principal) amounts of $1,000,or
multiples of $1,000.
Contract interest rate is fixed for term (life) of
the bond.
Face amount of bond repayable at maturity
date.
C13 - 10
Bond Variables and Constants
1,Constants – fixed by bond contract.
a,Principal (face) amount.
b,Contract rate of interest.
c,Term (life) of the bond.
2,Variables – determined in the bond market.
a,Market price of the bond.
b,Market (effective) interest rate.
C13 - 11
How are Bond Prices Determined
1,Present Value of Face Amount
The present value of the face amount (constant) of
the bond at its maturity date,based on the current
market interest rate (variable).
2,Present Value of Interest Payments
The present value of the periodic interest payments
(constant) for the term of the bonds,based on the
current market interest rate (variable).
The selling price of bonds are based on two amounts.
C13 - 12
Market and Contract Interest Rates
Differences in market and bond contract interest
rates result in Discounts and Premiums.
When Bonds sell at
Market rate = Contract rate
Market rate > Contract rate
Market rate < Contract rate
Face value
Discount
Premium
C13 - 13
Cash Flow of Bonds Payable
Cash Outflows:
Interest payments $ 60,000 = $ 43,133
(10 periods at $6,000)
Face amount 100,000 = 53,273
(at end of 5 years)
$160,000 = $96,403
Cash Inflows:
Selling proceeds $ 96,406 = $96,406
Present Values
On January 1,$100,000 of 12%,five-year bonds,with
interest of $6,000 payable semiannually are issued,
Market rate is 13% at date of issue.
C13 - 14
Cash Flow of Bonds Payable
Cash Outflows:
Interest payments $ 60,000 = $ 43,133
(10 periods at $6,000)
Face amount 100,000 = 43,133
(at end of 5 years)
$160,000 = $96,403
Cash Inflows:
Selling proceeds $ 96,403 = $96,403
Present Values
On January 1,$100,000 of 12%,five-year bonds,with
interest of $6,000 payable semiannually are issued,
Market rate is 13% at date of issue.
Present value of an annuity of $6,000 for
10 periods at a market rate of 6.5% per
period is $43,133.
Payment x Factor = Present Value
$6,000 x 7.1888 = $43,133
C13 - 15
Cash Flow of Bonds Payable
Cash Outflows:
Interest payments $ 60,000 = $ 43,133
(10 periods at $6,000)
Face amount 100,000 = 53,273
(at end of 5 years)
$160,000 = $96,403
Cash Inflows:
Selling proceeds $ 96,403 = $96,403
Present Values
On January 1,$100,000 of 12%,five-year bonds,with
interest of $6,000 payable semiannually are issued,
Market rate is 13% at date of issue.
Present value of $100,000 paid at the end
of 10 six-month periods at a market rate of
6.5% per period is $53,273.
Payment x Factor = Present Value
$100,000 x,53273 = $53,273
C13 - 16
Cash Flow of Bonds Payable
Present Values
On January 1,$100,000 of 12%,five-year bonds,with
interest of $6,000 payable semiannually are issued,
Market rate is 13% at date of issue.
Cash Outflows:
Interest payments $ 60,000 = $ 43,133
(10 periods at $6,000)
Face amount 100,000 = 53,273
(at end of 5 years)
$160,000 = $96,406
Cash Inflows:
Selling price $96,406
C13 - 17
The Time Value of Money – Future Value
The time value of money concept is used in many
business decisions,This concept is an important
consideration in accounting for bonds payable.
Present
Value
Future
Value
$1,000
$
What is the future value of $1,000 invested
today (present value) at 8% per year?
C13 - 18
The Time Value of Money – Future Value
The time value of money concept is used in many
business decisions,This concept is an important
consideration in accounting for bonds payable.
Present
Value
Future
Value
$1,000
= $1,000 + ($1,000 x 8%)
= $1,000 x 108% or 1.08
What is the future value of $1,000 invested
today (present value) at 8% per year?
$1,080
C13 - 19
The Time Value of Money – Present Value
The time value of money concept is used in many
business decisions,This concept is an important
consideration in accounting for bonds payable.
Present
Value
Future
Value
$
What is the present value of $1,000 to be
received one year from today at 8% per year?
$1,000
C13 - 20
The Time Value of Money – Present Value
The time value of money concept is used in many
business decisions,This concept is an important
consideration in accounting for bonds payable.
Present
Value
Future
Value
$ 925.93 = $1,000 / 108% or 1.08
What is the present value of $1,000 to be
received one year from today at 8% per year?
$1,000
C13 - 21
Calculating Present Values
Present values can be determined using present value
tables,mathematical formulas,calculators or computers,
Present value of $1 with Compound Interest
1,9434 = $1.0000 / 1.06
Calculator
PV Table
Period 6%
One dollar at the end of one
period at 6% per period is equal
to $.9434 today (present value).
C13 - 22
Calculating Present Values
Present values can be determined using present value
tables,mathematical formulas,calculators or computers,
Present value of $1 with Compound Interest
PV Table
Period 6%
One dollar at the end of two
periods at 6% per period is equal
to $.8900 today (present value).
To use the value from the prior
period as the starting point,don’t
clear your calculator.
1,9434 = $1.0000 / 1.06
2,8900 = $,9434 / 1.06
Calculator
C13 - 23
Calculating Present Values
Present values can be determined using present value
tables,mathematical formulas,calculators,or computers,
Present value of $1 with Compound Interest
PV Table
Period 6%
One dollar at the end of three
periods at 6% per period is equal
to $.8396 today (present value).
1,9434 = $1.0000 / 1.06
2,8900 = $,9434 / 1.06
3,8396 = $,8900 / 1.06
Calculator
C13 - 24
Calculating Present Values
Present values can be determined using present value
tables,mathematical formulas,calculators or computers,
Present value of $1 with Compound Interest
1,9434 = $1.0000 / 1.06
2,8900 = $,9434 / 1.06
3,8396 = $,8900 / 1.06
4,7921 = $,8396 / 1.06
5,7432 = $,7921 / 1.06
6,7050 = $,7432 / 1.06
PV Table
Period 6%
When using a calculator,learn to use constant division,
You will then enter $1 and 1.06 the first time,pressing
only the equal (=) key for each successive answer.
Calculator
C13 - 25
Calculating Present Values of Annuities
Present value of $1 — Annuity of $1
PV Table Annuity
Period 6% 6%
Calculation
Sum of Periods
1,9434,9434 = Period 1
2,8900 1.8334 = Periods 1–2
3,8396 2.6730 = Periods 1–3
4,7921 3.4651 = Periods 1–4
5,7432 4.2124 = Periods 1–5
4.2124
The PV of an annuity of $1 to be
received each year for two years is
$1.8334,This is the sum of the PV of
the two amounts for periods 1 and 2.
Annuities represent a series of equal amounts to be
paid or received in the future over equal periods.
C13 - 26
Calculating Present Values of Annuities
Present value of $1 — Annuity of 1$
PV Table Annuity
Period 6% 6%
Calculation
Sum of Periods
1,9434,9434 = Period 1
2,8900 1.8334 = Periods 1–2
3,8396 2.6730 = Periods 1–3
4,7921 3.4651 = Periods 1–4
5,7432 4.2124 = Periods 1–5
4.2124
The PV of an annuity of $1 to be
received each year for three year is
$2.6730,This is the sum of the PV of
the three amounts for periods 1–3.
Annuities represent a series of equal amounts to be
paid or received in the future over equal periods.
C13 - 27
Calculating Present Values of Annuities
Annuities represent a series of equal amounts to be
paid or received in the future over equal periods.
Present value of $1 — Annuity of 1$
PV Table Annuity
Period 6% 6%
Calculation
Sum of Periods
1,9434,9434 = Period 1
2,8900 1.8334 = Periods 1–2
3,8396 2.6730 = Periods 1–3
4,7921 3.4651 = Periods 1–4
5,7473 4.2124 = Periods 1–5
4.2124Total
C13 - 28
Cash 100,000
Bonds Payable 100,000
PV of face due in 5 years ($100,000 x 0.55840) = $55,840
PV of $1 for 10 periods at 6%
PV of 10 interest payments ($6,000 x 7.36009) = 44,160
PV of annuity of $1 for 10 periods at 6%
Total selling price = $100,000
Date Description Debit Credit
Bonds Issued at Face Amount
Jan,1
Issued 12%,five-year bonds at face.
On January 1,$100,000 of 12%,five-year bonds,with
interest of $6,000 payable semiannually are issued,
Market rate is 12% at date of issue.
C13 - 29
Date Description Debit Credit
Bonds Issued at a Discount
Cash 96,406
Discount on Bonds Payable 3,594
Bonds Payable 100,000
PV of face due in 5 years ($100,000 x 0.53273) = $53,273
(PV of $1 for 10 periods at 6.5%)
PV of 10 interest payments ($6,000 x 7.18883) = $43,133
(PV of annuity of $1 for 10 periods at 6.5%)
Total selling price = $96,406
Jan,1
Issued 12%,five-year bonds at a discount.
On January 1,$100,000 of 12%,five-year bonds,with
interest of $6,000 payable semiannually are issued,
Market rate is 13% at date of issue.
C13 - 30
Date Description Debit Credit
Amortization of a Bond Discount
Interest Expense 6,359.70
Discount on Bonds Payable 359.70
Cash 6,000.00
Jan,1
Issued 12%,five-year bonds at a discount.
The straight-line method amortizes bond discount in
equal periodic amounts,
Cash 96,406
Discount on Bonds Payable 3,594
Bonds Payable 100,000
Payment of semiannual interest and
amortization of 1/10 of bond discount.
Jun,30
C13 - 31
Date Description Debit Credit
Bonds Issued at a Premium
Cash 103,769
Bonds Payable 100,000
Premium on Bonds Payable 3,769
PV of face due in 5 years ($100,000 x 0.58543) = $ 58,543
(PV of $1 for 10 periods at 5.5%)
PV of 10 interest payments ($6,000 x 7.53763) = 45,226
(PV of annuity of $1 for 10 periods at 5.5%)
Total PV (selling price) = $103,769
Jan,1
Issued 12%,five-year bonds at a premium.
On January 1,$100,000 of 12%,five-year bonds,with
interest of $6,000 payable semiannually are issued,
Market rate is 11% at date of issue.
C13 - 32
Date Description Debit Credit
Amortization of a Bond Premium
Interest Expense 5,623.10
Premium on Bonds Payable 376.90
Cash 6,000.00
Jan,1
Issued 12%,five-year bonds at a premium.
The straight-line method amortizes bond premium in
equal periodic amounts,
Cash 103,769
Bonds Payable 100,000
Premium on Bonds Payable 3,769
Payment of semiannual interest and
amortization of 1/10 of bond premium.
Jun,30
C13 - 33
Date Description Debit Credit
Zero-Coupon Bonds
Cash 53,273
Discount on Bonds Payable 46,727
Bonds Payable 100,000
PV of face due in 5 years ($100,000 x 0.53273) = $53,273
(PV of $1 for 10 periods at 6.5%)
An investment of $53,273 today would yield $100,000 in
five years compounded semiannually at 6.5%,
Jan,1
Issued $100,000 five-year zero-coupon bonds.
Zero-coupon bonds do not provide for interest
payments,Only the face amount is paid at maturity,
Assume market rate is 13% at date of issue.
C13 - 34
Date Description Debit Credit
Bond Redemption
Bonds Payable 25,000
Premium on Bonds Payable 1,000
Gain on Redemption of Bonds 2,000
Cash 24,000
Redeemed one-fourth of the total bonds,
A corporation may call or redeem its bonds before
they mature,Assume a bond issue of $100,000 and
an unamortized premium of $4,000,Carrying value is
$96,000 and one-fourth of the bonds are purchased.
Jun,30
C13 - 35
Date Description Debit Credit
Investments in Bonds
Investment in Bonds 1,025.30
Interest Revenue 10.20
Cash 1,035.50
Investors do not usually record premium (or
discount) in separate accounts because bonds
are not often held until maturity.
Purchased a $1,000 bond at 102 plus a brokerage
fee of $5.30 and accrued interest of $10.20
Bonds are purchased directly from the issuing corporation
or through an organized bond exchange,Bond prices are
quoted as a percentage of the face amount,
Apr,2
C13 - 36
Solvency Measures — The Long-Term Creditor
Number of Times Interest Charges Earned
2003 2002
Income before income tax $ 900,000 $ 800,000
Add interest expense 300,000 250,000
Amount available for interest $1,200,000 $1,050,000
C13 - 37
Solvency Measures — The Long-Term Creditor
Number of Times Interest Charges Earned
Use,To assess the risk to debtholders in terms
of number of times interest charges were
earned.
2003 2002
Income before income tax $ 900,000 $ 800,000
Add interest expense 300,000 250,000
Amount available for interest $1,200,000 $1,050,000
Number of times earned 4.0 times 4.2 times
C13 - 38
Note,To see the topic slide,type 2 and press Enter.
This is the last slide in Chapter F13,
Power NotesChapter F13
Bonds Payable and Investments in Bonds
Learning Objectives
Power Notes
1,Financing Corporations
2,Characteristics of Bonds Payable
3,The Present-Value Concept and Bonds Payable
4,Accounting for Bonds Payable
5,Bond Sinking Funds
6,Bond Redemption
7,Investments in Bonds
8,Corporation Balance Sheet
9,Financial Analysis and Interpretation
Chapter F13
C13
Bonds Payable and Investments in Bonds
C13 - 2
Long-Term Financing
Characteristics of Bonds Payable
Time Value of Money
Issuing Bonds Payable
Redemption of Bonds Payable
Investments in Bonds
Number of Times Interest Earned
Slide # Power Note Topics
3
9
17
28
34
35
36
Note,To select a topic,type the slide # and press Enter.
Power NotesChapter F13
Bonds Payable and Investments in Bonds
C13 - 3
Two Methods of Long-Term Financing
Resources = Sources
Stockholders’
Equity
Assets
Liabilities
C13 - 4
Two Methods of Long-Term Financing
Resources = Sources
Stockholders’
Equity
Assets
Liabilities
Equity Financing – Stockholders
C13 - 5
Two Methods of Long-Term Financing
Resources = Sources
Stockholders’
Equity
Assets
Liabilities
Bondholders
Equity Financing – Stockholders
Debt Financing – Bondholders
C13 - 6
Two Methods of Financing
Bondholders
Bonds (debt) – Interest payments to bondholders
are an expense that reduces taxable income.
Stock (equity) – Dividend payments are made from
after tax net income and retained earnings,
Earnings per share on common stock can often
be increased by issuing bonds rather than
additional stock.
Why issue bonds rather than stock?
Stockholders
C13 - 7
Alternative Financing Plans – $800,000 Earnings
Plan 1 Plan 2 Plan 3
12 % bonds — — $2,000,000
Preferred 9% stock,$50 par — $2,000,000 1,000,000
Common stock,$10 par $4,000,000 2,000,000 1,000,000
Total $4,000,000 $4,000,000 $4,000,000
Earnings before interest
and income tax $ 800,000 $ 800,000 $ 800,000
Deduct interest on bonds — — 240,000
Income before income tax $ 800,000 $ 800,000 $ 560,000
Deduct income tax 320,000 320,000 224,000
Net income $ 480,000 $ 480,000 $ 336,000
Dividends on preferred stock — 180,000 90,000
Available for dividends $ 480,000 $ 300,000 $ 246,000
Shares of common stock400,000200,000100,000
Earnings per share $ 1.20 $ 1.50 $ 2.46
C13 - 8
Alternative Financing Plans – $440,000 Earnings
Plan 1 Plan 2 Plan 3
12 % bonds — — $2,000,000
Preferred 9% stock,$50 par — $2,000,000 1,000,000
Common stock,$10 par $4,000,000 2,000,000 1,000,000
Total $4,000,000 $4,000,000 $4,000,000
Earnings before interest
and income tax $ 440,000 $ 440,000 $ 440,000
Deduct interest on bonds — — 240,000
Income before income tax $ 440,000 $ 440,000 $ 200,000
Deduct income tax 176,000 176,000 80,000
Net income $ 264,000 $ 264,000 $ 120,000
Dividends on preferred stock — 180,000 90,000
Available for dividends $ 264,000 $ 84,000 $ 30,000
Shares of common stock400,000200,000100,000
Earnings per share $ 0.66 $ 0.42 $ 0.30
C13 - 9
Characteristics of Bonds Payable
Long-term debt – repayable 10,20,or 30 years
after date of issuance.
Issued in face (principal) amounts of $1,000,or
multiples of $1,000.
Contract interest rate is fixed for term (life) of
the bond.
Face amount of bond repayable at maturity
date.
C13 - 10
Bond Variables and Constants
1,Constants – fixed by bond contract.
a,Principal (face) amount.
b,Contract rate of interest.
c,Term (life) of the bond.
2,Variables – determined in the bond market.
a,Market price of the bond.
b,Market (effective) interest rate.
C13 - 11
How are Bond Prices Determined
1,Present Value of Face Amount
The present value of the face amount (constant) of
the bond at its maturity date,based on the current
market interest rate (variable).
2,Present Value of Interest Payments
The present value of the periodic interest payments
(constant) for the term of the bonds,based on the
current market interest rate (variable).
The selling price of bonds are based on two amounts.
C13 - 12
Market and Contract Interest Rates
Differences in market and bond contract interest
rates result in Discounts and Premiums.
When Bonds sell at
Market rate = Contract rate
Market rate > Contract rate
Market rate < Contract rate
Face value
Discount
Premium
C13 - 13
Cash Flow of Bonds Payable
Cash Outflows:
Interest payments $ 60,000 = $ 43,133
(10 periods at $6,000)
Face amount 100,000 = 53,273
(at end of 5 years)
$160,000 = $96,403
Cash Inflows:
Selling proceeds $ 96,406 = $96,406
Present Values
On January 1,$100,000 of 12%,five-year bonds,with
interest of $6,000 payable semiannually are issued,
Market rate is 13% at date of issue.
C13 - 14
Cash Flow of Bonds Payable
Cash Outflows:
Interest payments $ 60,000 = $ 43,133
(10 periods at $6,000)
Face amount 100,000 = 43,133
(at end of 5 years)
$160,000 = $96,403
Cash Inflows:
Selling proceeds $ 96,403 = $96,403
Present Values
On January 1,$100,000 of 12%,five-year bonds,with
interest of $6,000 payable semiannually are issued,
Market rate is 13% at date of issue.
Present value of an annuity of $6,000 for
10 periods at a market rate of 6.5% per
period is $43,133.
Payment x Factor = Present Value
$6,000 x 7.1888 = $43,133
C13 - 15
Cash Flow of Bonds Payable
Cash Outflows:
Interest payments $ 60,000 = $ 43,133
(10 periods at $6,000)
Face amount 100,000 = 53,273
(at end of 5 years)
$160,000 = $96,403
Cash Inflows:
Selling proceeds $ 96,403 = $96,403
Present Values
On January 1,$100,000 of 12%,five-year bonds,with
interest of $6,000 payable semiannually are issued,
Market rate is 13% at date of issue.
Present value of $100,000 paid at the end
of 10 six-month periods at a market rate of
6.5% per period is $53,273.
Payment x Factor = Present Value
$100,000 x,53273 = $53,273
C13 - 16
Cash Flow of Bonds Payable
Present Values
On January 1,$100,000 of 12%,five-year bonds,with
interest of $6,000 payable semiannually are issued,
Market rate is 13% at date of issue.
Cash Outflows:
Interest payments $ 60,000 = $ 43,133
(10 periods at $6,000)
Face amount 100,000 = 53,273
(at end of 5 years)
$160,000 = $96,406
Cash Inflows:
Selling price $96,406
C13 - 17
The Time Value of Money – Future Value
The time value of money concept is used in many
business decisions,This concept is an important
consideration in accounting for bonds payable.
Present
Value
Future
Value
$1,000
$
What is the future value of $1,000 invested
today (present value) at 8% per year?
C13 - 18
The Time Value of Money – Future Value
The time value of money concept is used in many
business decisions,This concept is an important
consideration in accounting for bonds payable.
Present
Value
Future
Value
$1,000
= $1,000 + ($1,000 x 8%)
= $1,000 x 108% or 1.08
What is the future value of $1,000 invested
today (present value) at 8% per year?
$1,080
C13 - 19
The Time Value of Money – Present Value
The time value of money concept is used in many
business decisions,This concept is an important
consideration in accounting for bonds payable.
Present
Value
Future
Value
$
What is the present value of $1,000 to be
received one year from today at 8% per year?
$1,000
C13 - 20
The Time Value of Money – Present Value
The time value of money concept is used in many
business decisions,This concept is an important
consideration in accounting for bonds payable.
Present
Value
Future
Value
$ 925.93 = $1,000 / 108% or 1.08
What is the present value of $1,000 to be
received one year from today at 8% per year?
$1,000
C13 - 21
Calculating Present Values
Present values can be determined using present value
tables,mathematical formulas,calculators or computers,
Present value of $1 with Compound Interest
1,9434 = $1.0000 / 1.06
Calculator
PV Table
Period 6%
One dollar at the end of one
period at 6% per period is equal
to $.9434 today (present value).
C13 - 22
Calculating Present Values
Present values can be determined using present value
tables,mathematical formulas,calculators or computers,
Present value of $1 with Compound Interest
PV Table
Period 6%
One dollar at the end of two
periods at 6% per period is equal
to $.8900 today (present value).
To use the value from the prior
period as the starting point,don’t
clear your calculator.
1,9434 = $1.0000 / 1.06
2,8900 = $,9434 / 1.06
Calculator
C13 - 23
Calculating Present Values
Present values can be determined using present value
tables,mathematical formulas,calculators,or computers,
Present value of $1 with Compound Interest
PV Table
Period 6%
One dollar at the end of three
periods at 6% per period is equal
to $.8396 today (present value).
1,9434 = $1.0000 / 1.06
2,8900 = $,9434 / 1.06
3,8396 = $,8900 / 1.06
Calculator
C13 - 24
Calculating Present Values
Present values can be determined using present value
tables,mathematical formulas,calculators or computers,
Present value of $1 with Compound Interest
1,9434 = $1.0000 / 1.06
2,8900 = $,9434 / 1.06
3,8396 = $,8900 / 1.06
4,7921 = $,8396 / 1.06
5,7432 = $,7921 / 1.06
6,7050 = $,7432 / 1.06
PV Table
Period 6%
When using a calculator,learn to use constant division,
You will then enter $1 and 1.06 the first time,pressing
only the equal (=) key for each successive answer.
Calculator
C13 - 25
Calculating Present Values of Annuities
Present value of $1 — Annuity of $1
PV Table Annuity
Period 6% 6%
Calculation
Sum of Periods
1,9434,9434 = Period 1
2,8900 1.8334 = Periods 1–2
3,8396 2.6730 = Periods 1–3
4,7921 3.4651 = Periods 1–4
5,7432 4.2124 = Periods 1–5
4.2124
The PV of an annuity of $1 to be
received each year for two years is
$1.8334,This is the sum of the PV of
the two amounts for periods 1 and 2.
Annuities represent a series of equal amounts to be
paid or received in the future over equal periods.
C13 - 26
Calculating Present Values of Annuities
Present value of $1 — Annuity of 1$
PV Table Annuity
Period 6% 6%
Calculation
Sum of Periods
1,9434,9434 = Period 1
2,8900 1.8334 = Periods 1–2
3,8396 2.6730 = Periods 1–3
4,7921 3.4651 = Periods 1–4
5,7432 4.2124 = Periods 1–5
4.2124
The PV of an annuity of $1 to be
received each year for three year is
$2.6730,This is the sum of the PV of
the three amounts for periods 1–3.
Annuities represent a series of equal amounts to be
paid or received in the future over equal periods.
C13 - 27
Calculating Present Values of Annuities
Annuities represent a series of equal amounts to be
paid or received in the future over equal periods.
Present value of $1 — Annuity of 1$
PV Table Annuity
Period 6% 6%
Calculation
Sum of Periods
1,9434,9434 = Period 1
2,8900 1.8334 = Periods 1–2
3,8396 2.6730 = Periods 1–3
4,7921 3.4651 = Periods 1–4
5,7473 4.2124 = Periods 1–5
4.2124Total
C13 - 28
Cash 100,000
Bonds Payable 100,000
PV of face due in 5 years ($100,000 x 0.55840) = $55,840
PV of $1 for 10 periods at 6%
PV of 10 interest payments ($6,000 x 7.36009) = 44,160
PV of annuity of $1 for 10 periods at 6%
Total selling price = $100,000
Date Description Debit Credit
Bonds Issued at Face Amount
Jan,1
Issued 12%,five-year bonds at face.
On January 1,$100,000 of 12%,five-year bonds,with
interest of $6,000 payable semiannually are issued,
Market rate is 12% at date of issue.
C13 - 29
Date Description Debit Credit
Bonds Issued at a Discount
Cash 96,406
Discount on Bonds Payable 3,594
Bonds Payable 100,000
PV of face due in 5 years ($100,000 x 0.53273) = $53,273
(PV of $1 for 10 periods at 6.5%)
PV of 10 interest payments ($6,000 x 7.18883) = $43,133
(PV of annuity of $1 for 10 periods at 6.5%)
Total selling price = $96,406
Jan,1
Issued 12%,five-year bonds at a discount.
On January 1,$100,000 of 12%,five-year bonds,with
interest of $6,000 payable semiannually are issued,
Market rate is 13% at date of issue.
C13 - 30
Date Description Debit Credit
Amortization of a Bond Discount
Interest Expense 6,359.70
Discount on Bonds Payable 359.70
Cash 6,000.00
Jan,1
Issued 12%,five-year bonds at a discount.
The straight-line method amortizes bond discount in
equal periodic amounts,
Cash 96,406
Discount on Bonds Payable 3,594
Bonds Payable 100,000
Payment of semiannual interest and
amortization of 1/10 of bond discount.
Jun,30
C13 - 31
Date Description Debit Credit
Bonds Issued at a Premium
Cash 103,769
Bonds Payable 100,000
Premium on Bonds Payable 3,769
PV of face due in 5 years ($100,000 x 0.58543) = $ 58,543
(PV of $1 for 10 periods at 5.5%)
PV of 10 interest payments ($6,000 x 7.53763) = 45,226
(PV of annuity of $1 for 10 periods at 5.5%)
Total PV (selling price) = $103,769
Jan,1
Issued 12%,five-year bonds at a premium.
On January 1,$100,000 of 12%,five-year bonds,with
interest of $6,000 payable semiannually are issued,
Market rate is 11% at date of issue.
C13 - 32
Date Description Debit Credit
Amortization of a Bond Premium
Interest Expense 5,623.10
Premium on Bonds Payable 376.90
Cash 6,000.00
Jan,1
Issued 12%,five-year bonds at a premium.
The straight-line method amortizes bond premium in
equal periodic amounts,
Cash 103,769
Bonds Payable 100,000
Premium on Bonds Payable 3,769
Payment of semiannual interest and
amortization of 1/10 of bond premium.
Jun,30
C13 - 33
Date Description Debit Credit
Zero-Coupon Bonds
Cash 53,273
Discount on Bonds Payable 46,727
Bonds Payable 100,000
PV of face due in 5 years ($100,000 x 0.53273) = $53,273
(PV of $1 for 10 periods at 6.5%)
An investment of $53,273 today would yield $100,000 in
five years compounded semiannually at 6.5%,
Jan,1
Issued $100,000 five-year zero-coupon bonds.
Zero-coupon bonds do not provide for interest
payments,Only the face amount is paid at maturity,
Assume market rate is 13% at date of issue.
C13 - 34
Date Description Debit Credit
Bond Redemption
Bonds Payable 25,000
Premium on Bonds Payable 1,000
Gain on Redemption of Bonds 2,000
Cash 24,000
Redeemed one-fourth of the total bonds,
A corporation may call or redeem its bonds before
they mature,Assume a bond issue of $100,000 and
an unamortized premium of $4,000,Carrying value is
$96,000 and one-fourth of the bonds are purchased.
Jun,30
C13 - 35
Date Description Debit Credit
Investments in Bonds
Investment in Bonds 1,025.30
Interest Revenue 10.20
Cash 1,035.50
Investors do not usually record premium (or
discount) in separate accounts because bonds
are not often held until maturity.
Purchased a $1,000 bond at 102 plus a brokerage
fee of $5.30 and accrued interest of $10.20
Bonds are purchased directly from the issuing corporation
or through an organized bond exchange,Bond prices are
quoted as a percentage of the face amount,
Apr,2
C13 - 36
Solvency Measures — The Long-Term Creditor
Number of Times Interest Charges Earned
2003 2002
Income before income tax $ 900,000 $ 800,000
Add interest expense 300,000 250,000
Amount available for interest $1,200,000 $1,050,000
C13 - 37
Solvency Measures — The Long-Term Creditor
Number of Times Interest Charges Earned
Use,To assess the risk to debtholders in terms
of number of times interest charges were
earned.
2003 2002
Income before income tax $ 900,000 $ 800,000
Add interest expense 300,000 250,000
Amount available for interest $1,200,000 $1,050,000
Number of times earned 4.0 times 4.2 times
C13 - 38
Note,To see the topic slide,type 2 and press Enter.
This is the last slide in Chapter F13,
Power NotesChapter F13
Bonds Payable and Investments in Bonds
