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Chapter 14: 4Q (page 752)

Distinguish between the following values relative to bonds payable:

(a) Maturity value. (c) Market (fair) value.

(b) Face value. (d) Par value.

Short Answer

Expert verified

Maturity value

Value payable at the end of life of the bond.

Face value

The value is established by the bond issuer.

Market value

Present value of all the future cash flows from the bonds.

Par value

Value of each bond as stated by the issuing entity.

Step by step solution

01

Definition of Bonds Payable

Bonds payable can be defined as the security issued by the business entity for generating cash for the business entity. These securities are debt securities.

02

Difference between the values relative to bonds payable

  1. Maturity value: Maturity value can be defined as the value payable to the holder at the end of the bond’s life. This value can also be stated as the principal value of the bond payable.
  2. Face value: The price of each bond established by the issuer is the face value of the bonds payable. The bonds might be issued at a higher or lower price than the face value.
  3. Market (fair) value: Fair value of the bond can be defined as the present value of the bond calculated using the stream of future cash flow. This value is calculated using the discounted rate.
  4. Par value: Par value can be defined as the value of a bond as stated by the company issuing it. Discount and premium on the bond are calculated using the par value and issued value of the bond payable.

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Most popular questions from this chapter

On April 1, 2017, Seminole Company sold 15,000 of its 11%, 15-year, \(1,000 face value bonds at 97. Interest payment dates are April 1 and October 1, and the company uses the straight-line method of bond discount amortization. On March 1, 2018, Seminole took advantage of favorable prices of its stock to extinguish 6,000 of the bonds by issuing 200,000 shares of its \)10 par value common stock. At this time, the accrued interest was paid in cash. The company’s stock was selling for $31 per share on March 1, 2018.

Instructions

Prepare the journal entries needed on the books of Seminole Company to record the following.

(a) April 1, 2017: issuance of the bonds.

(b) October 1, 2017: payment of semi-annual interest.

(c) December 31, 2017: accrual of interest expense.

(d) March 1, 2018: extinguishment of 6,000 bonds. (No reversing entries made.)

What is off-balance sheet financing? Why might a company be interested in using off-balance sheet financing?

Teton Corporation issued \(600,000 of 7% bonds on November 1, 2017, for \)644,636. The bonds were dated November 1, 2017, and mature in 10 years, with interest payable each May 1 and November 1. Teton uses the effective-interest method with an effective rate of 6%. Prepare Teton’s December 31, 2017, adjusting entry.

On January 1, 2017, Nichols Company issued for \(1,085,800 its 20-year, 11% bonds that have a maturity value of \)1,000,000 and pay interest semiannually on January 1 and July 1. The following are three presentations of the long-term liability section of the balance sheet that might be used for these bonds at the issue date.

1

Bonds payable (maturing January 1, 2037)

\(1,000,000

Unamortized premium on bonds payable

85,800

Total bond liability

\)1,085,800

2

Bonds payable—principal (face value \(1,000,000 maturing January 1, 2037)

\) 142,050a

Bonds payable—interest (semiannual payment \(55,000)

943,750b

Total bond liability

\)1,085,800

3

Bonds payable—principal (maturing January 1, 2037)

\(1,000,000

Bonds payable—interest (\)55,000 per period for 40 periods)

2,200,000

Total bond liability

\(3,200,000

aThe present value of \)1,000,000 due at the end of 40 (6-month) periods at the yield rate of 5% per period

bThe present value of \(55,000 per period for 40 (6-month) periods at the yield rate of 5% per period.

Instructions

(a) Discuss the conceptual merit(s) of each of the date-of-issue balance sheet presentations shown above for these bonds.

(b) Explain why investors would pay \)1,085,800 for bonds that have a maturity value of only $1,000,000.

(c)Assuming that a discount rate is needed to compute the carrying value of the obligations arising from a bond issue at any date during the life of the bonds, discuss the conceptual merit(s) of using for this purpose: (1) The coupon or nominal rate. (2) The effective or yield rate at date of issue.

(d)If the obligations arising from these bonds are to be carried at their present value computed by means of the current market rate of interest, how would the bond valuation at dates subsequent to the date of the issue be affected by an increase or a decrease in the market rate of interest?

(Entries for Redemption and Issuance of Bonds) Matt Perry, Inc. had outstanding \(6,000,000 of 11% bonds (interest payable July 31 and January 31) due in 10 years. On July 1, it issued \)9,000,000 of 10%, 15-year bonds (interest payable July 1 and January 1) at 98. A portion of the proceeds was used to call the 11% bonds (with unamortized discount of $120,000) at 102 on August 1.

Instructions

Prepare the journal entries necessary to record issue of the new bonds and refunding of the bonds.
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