This is called financial leverage, and it takes place when the borrowed money is expected to earn a higher return than the cost of interest payable on the debt. Oddly enough, debt can end up making a company money. Favorite Answer. So on the balance sheet, carry value is $ 102,577 which is the present value of cash flow. In other words, if the bonds are a long-term liability, both Bonds Payable and Premium on Bonds Payable will be reported on the balance sheet as long … Under this method, the bond premium to be amortized periodically is calculated by using the following formula: Bond Premium Amortized= P x R – N x Y To make the concept come alive for you, consider a common example you will see in your intermediate accounting textbook. Part 2.1 - Issuing Bonds Payable & Long-Term Notes Payable, Advantages & Disadvantages of Bonds Payable, Par Value & Bond Certificates ; Part 2.2 - Example of Return on Equity & Raising Capital through Bonds & … Example 1. The decrease in assets is less than the decrease in liabilities. Bondholder may decide to convert the bond to equity share at the maturity date when the share price increase. [10] Journal entries April 1, 2004 Corporation, which has a 12/31 year end, authorized $1,500,000 of callable, mortgage bonds (secured by $2,200,000 of property and equipment, at market value). Premium on Sale of Refunding Bonds Accrued Interest Payable (Sinking Fund Accruals) Fund 8 - Retirement of Indebtedness . Quick and dirty, for Year 1, cash paid is $7,000, interest expense is $6,208 ($103,465 x .06), and the premium amortized is $792 ($7,000 – $6,208). at a premium. To a business, a bond payable represents a series of regular interest payments together with a final principal repayment at the maturity date. A company prepared the following journal entry: Bonds payable Premium on bonds payable Gain on bond retirement Cash Which of the following statements is incorrect? A business issues a note payable when there is a small loan required from a single lender. Typical financial statement accounts with debit/credit rules and disclosure conventions How to Account for Discounted Bonds - dummies. The last two journals could be combined to show a total interest expense of 5,000 + 736 = 5,736. The difference, in this case, is a credit to the Premium Bonds account of $7,722. (2 days ago) Bonds payable, notes payable, and liabilities will introduce the concept of bonds from a corporate perspective and explain how to record the issuance of bonds and notes payable. COUPON (2 days ago) The journal entry to record this transaction is to debit cash for $103,465. Under this method, the bond premium to be amortized periodically is calculated by using the following formula: Bond Premium Amortized= P x R – N x Y. At the end of the 5 year period on the maturity date, the business will need to pay the investor the market price for the bond. The yield to maturity formula takes into account interest payments and capital gains. Hence, the carrying amount is $105,000 ($100,000 plus $5,000). Assume the balance in Premium on Bonds Payable is $9,000. For example, a business may issue a 5 year bond on which it will pay interest to the investor. The bonds YTM is also referred to as the redemption yield. The Journal Entry for this would be . Finally, at the end of the 5 year term (the maturity date) the bond payable has to be paid and the following journal completes the transaction. On the due date the bond holder would remove the coupon and exchange it at the bank for the interest payment. In this example the useful life is 10 periods and the amortization is 7,360 / 10 = 736 per period. The current balance in the premium on bonds payable account is $5,000. The premium of $3,465 has to be amortized for the time the bonds are outstanding. Prepare the journal entry to record the retirement of the bonds before maturity at 98. 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