A loan cut into small pieces, usually $1,000 each, so many people can lend. The company that borrows is the issuer; whoever holds a piece is a bondholder, the lender.

The four facts printed on a bond certificate?

The issuer, the face value (par), the contractual rate (also called the stated or coupon rate) and the maturity date. They are printed, so they never change. The face is repaid at maturity but is not always the cash received on the day of sale.

Indenture vs certificate?

The indenture is the full contract behind the bond: every promise and what lenders can do if one is broken. The certificate is each lender's own paper, showing the four key facts.

What does the trustee do?

Usually a bank, it watches the company for all the bondholders. It keeps the list of holders, keeps the unsold pieces and holds anything promised as security.

Secured vs unsecured bonds?

A secured bond has assets promised to the lenders. A mortgage bond is backed by land and buildings; a sinking fund bond by money set aside to pay it off. An unsecured bond, a debenture, has only the company's good name.

Term bond vs serial bond?

A term bond is repaid all on one day. A serial bond is repaid in slices over several years.

Convertible vs callable?

Convertible: the LENDER may swap the bond for common stock. Callable: the BORROWER may buy it back early at the call price, e.g. 103 means 103% of face.

Debt vs shares, in words?

Lenders get no vote, so owners keep control. Interest lowers the tax bill; dividends do not. But interest and face must be paid on time, even in a bad year, while shares never have to be paid back.

Money in hand now beats the same sum paid later, because the money in hand can earn interest. So future cash must be brought back to today before it is compared.

What is a bond's price?

The present value of all its future cash — every coupon plus the face at maturity — worked at the MARKET rate, not the coupon rate.

Pricing method one: the timeline?

Divide each future cash flow by (1 + market rate) once for every year you wait, then add up all the pieces. The total is the price.

Pricing method two: the BA II Plus keys?

Set 2ND I/Y 1 ENTER (one payment a year), 2ND CPT to quit, and 2ND FV to clear old numbers. Then N, I/Y typed as 6 not 0.06, PMT = coupon, FV = face, CPT PV.

Why does CPT PV show a minus?

It is not an error. The coupons and face come in as plus, so the price you pay today goes out as a minus. Read the number without the sign.

The coupon rate is the fixed pivot. Market rate above the coupon rate: price below face (discount). Equal: price at face. Below: price above face (premium).

Does a discount mean a weak company?

No. A discount only means the market rate moved above the printed rate after the bond was printed. A premium does not mean a strong company either.

How is a bond quote read?

As a percent of face. Cash = face × quote. Example: a $300,000 bond at 98 brings in $294,000.

Issuing at face — the entry?

Debit Cash, credit Bonds Payable, both for the face. The market rate equals the coupon rate, so there is no discount or premium.

The December 31 accrual and the January 1 payment?

Dec 31: debit Interest Expense, credit Interest Payable for face × coupon rate. Jan 1: debit Interest Payable, credit Cash. The Jan 1 entry records NO new expense.

Interest for part of a year?

Face × coupon rate × months/12. Example: $120,000 × 5% × 3/12 = $1,500.

Issuing at a discount — the entry?

Debit Cash for the price, debit Discount on Bonds Payable for the gap, and Bonds Payable is credited at face.

What kind of account is Discount on Bonds Payable?

A contra liability, never an asset. It sits under Bonds Payable and is subtracted: carrying value = face − discount.

Issuing at a premium — the entry?

Debit Cash for the price, Bonds Payable is credited at face, and Premium on Bonds Payable takes the extra as a credit.

What kind of account is Premium on Bonds Payable?

An adjunct liability: it is added to Bonds Payable, so carrying value = face + premium. It is never revenue or a gain — the company borrowed that money.

Straight-line amortization?

Spread the discount or premium evenly over the bond's life: slice = discount (or premium) ÷ years. The same slice every year, like straight-line depreciation.

Dec 31 entry with a discount, easiest line to hardest?

Credit Interest Payable for face × coupon rate. Credit Discount on Bonds Payable for the slice. Debit Interest Expense as the plug: coupon + slice.

Dec 31 entry with a premium, easiest line to hardest?

Credit Interest Payable for face × coupon rate. Debit Premium on Bonds Payable for the slice. Debit Interest Expense as the plug: coupon − slice.

What does amortization do to interest expense?

A discount RAISES the expense above the cash coupon — it is a hidden cost. A premium LOWERS the expense below the cash coupon.

What does the amortization schedule show?

Year by year: the slice and the carrying value. A discount's carrying value climbs up to face; a premium's walks down to face. At maturity nothing is left.

Total cost of borrowing?

Discount: all the coupons + the discount. Premium: all the coupons − the premium. It equals the interest expense over the bond's whole life.

Redemption at maturity — the entry?

Debit Bonds Payable, credit Cash, both for the face. The discount or premium is already used up, so there is no gain or loss.

Early redemption — the entry and the gain/loss rule?

Right after a Jan 1 coupon: debit Bonds Payable (face), debit what is left of the premium or credit what is left of the discount, credit Cash. Pay more than carrying value = Loss on Bond Redemption; pay less = Gain on Bond Redemption.

Converting bonds into common stock — at what amount?

At CARRYING value, never market value, so there is no gain or loss. Shares = bonds converted × conversion ratio.

Conversion entry — the lines?

Debit Bonds Payable and the leftover premium (or credit the leftover discount). Credit Common Stock for shares × par, and credit Paid-in Capital in Excess of Par—Common Stock as the plug.

Convert only that fraction: the same fraction of Bonds Payable and of the unamortized premium or discount. Example: half the bonds take half the leftover premium.

Mortgage note — day one and the payment?

Day one: debit Cash, credit Mortgage Payable. The yearly payment comes from the BA II Plus CPT PMT, cents dropped. Each payment: debit Interest Expense and Mortgage Payable, credit Cash.

The three mortgage steps, every year?

1) Interest = opening balance × rate. 2) Principal = payment − interest. 3) Closing = opening − principal. The closing balance is next year's opening.

The classic slip on a mortgage payment?

Debiting the whole payment to Mortgage Payable. Only the principal lowers the loan; the interest part is an expense.

Current portion of a mortgage?

Next year's principal, read from next year's row of the schedule. Long-term part = balance − current portion. It is a reclassification on the balance sheet — NO journal entry.

When does a bond become a current liability?

Only in its last year, all at once, at its carrying value (face plus leftover premium or less leftover discount). It stays long-term if there is the intent AND the ability to refinance, e.g. a signed financing agreement.

How is the balance sheet's liabilities section laid out?

Current liabilities come first: e.g. interest payable, the current portion of the mortgage, and a bond in its last year at carrying value. Then long-term: bonds at carrying value (face less discount, or plus premium) and the long-term part of the mortgage.

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Accounting 2 · Chapter 15 · Free

Chapter 15 — Long-Term Liabilities & Bonds

How companies borrow for the long term — what a bond is and how it is priced, recording bonds issued at face, at a discount and at a premium with their amortization, paying bonds off early, mortgage notes and their amortization schedule, and showing the current portion of long-term debt on the balance sheet.

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What you'll learn

Explain what a bond is, the main kinds of bonds, and why a company issues bonds instead of shares
Price a bond as the present value of its interest payments and its face, by table and on a financial calculator
Record bonds issued at face, at a discount and at a premium, and amortize the discount or premium
Record paying bonds off before maturity, with the gain or loss on redemption
Split each mortgage payment into interest and principal, build the amortization schedule and record the payment
Show the current portion of long-term debt and present long-term liabilities on the balance sheet

Lecture

Full lecture (multi-part)

Part 1 — What a Bond Is, and Why Companies Issue Them

Part 2 — How to Price a Bond: Present Value, Two Ways

Part 3 — Bonds Issued at Face and at a Discount: Entries & Amortization

Part 4 — Bonds Issued at a Premium, and Paying Bonds Off Early

Part 5 — The Mortgage: Payment, Amortization Schedule & Journal Entry

Part 6 — The Current Portion of Long-Term Debt on the Balance Sheet

Deep Dive

Deep Dive — The Effective Interest Method of Bond Amortization

Deep Dive — Converting Bonds into Common Stock: Why There's No Loss

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Exam Cram — Bonds Payable: Discount & Premium, Fast

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Chapter 15 — Long-Term Liabilities & Bonds

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