Chapter 14 Power Point Notes Flashcards
Interest Expense
the effective interest rate times the amount of the debt outstanding during the period.
Debenture Bond
secured by the “full faith and credit” of company.
Mortgage Bond
secured by lien on specific real estate owned by the issuer
Coupon Bond
pays interest when investor submits attached coupon.
Callable Bond
allows company to buy back outstanding bonds prior to maturity.
Buyer JE for a N/P on a purchase of Machinery
Machinery 666,633
Discount on note payable 33,367
Notes payable 700,000
Buyer JE for interest on N/P for the purchase of machinery
Interest expense 46,664
Discount on note payable 4,664
Cash 42,000
Seller JE for a N/P on a sale of Machinery
Notes receivable 700,000
Discount on notes receivable 33,367
Sales revenue 666,633
Seller JE for interest for a N/P on a sale of Machinery
Cash 42,000
Discount on notes receivable 4,664
Investment revenue 46,664
Interest Payments on bonds equal
Stated Rate X Face Value
Interest Expense on bonds equal
Market Rate X Carrying Value
Bonds issued at par
Bond issue price exactly equals face value
This implies the coupon rate exactly equals the market rate on the day of the issue
Coupon exactly compensates the bondholder for the risk
Bonds issued at a discount
Bond issue price is below face value
This implies the coupon rate is below the market rate on the day of the issue
Coupon does not compensate the bondholder enough
Bonds issued at a premium
Bond issue price is above face value
This implies the coupon rate is above the market rate on the day of the issue
Coupon compensates the bondholder too much
JE for bonds issued between interest dates
Dr. Cash (99 plus 2) 101
Cr. Bonds Payable 99
Cr. Interest Payable 2