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DO IT ! 2a Bond Issuance

Giant Corporation issues $200,000 of bonds for $189,000. (a) Prepare the journal entry
to record the issuance of the bonds, and (b) show how the bonds would be reported on
the balance sheet at the date of issuance.
(a) Cash 189,000
Discount on Bonds Payable 11,000
Bonds Payable 200,000
(b) Long-term liabilities
Bonds payable $200,000
Less: Discount on bonds payable 11,000 $189,000

Redeeming Bonds at Maturity :

Illustration : (100,00$ face value)

Assuming that the company pays and records separately the interest for the last
interest period, Candlestick records the redemption of its bonds at maturity as follows:

Bonds Payable 100,000

Cash 100,000

Redeeming Bonds before Maturity :

When bonds are redeemed before maturity, it is necessary to:
1 eliminate carrying value of bonds at redemption date;
2 record cash paid; and
3 recognize gain or loss on redemption.

The carrying value of the bonds is the face value of the bonds less any remaining bond
discount or plus any remaining bond premium at the redemption date.

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Illustration :
Assume Candlestick Inc. has sold its bonds at a premium(100,000$ Face value). At
the end of the fourth period, Candlestick retires these bonds at 103 after paying the
annual interest. The carrying value of the bonds at the redemption date is
$100,400. Candlestick makes the following entry to record the redemption at the
end of the fourth interest period (January 1, 2024):

Bonds Payable 100,000

Premium on Bonds Payable 400
Loss on Bond Redemption 2,600
Cash 103,000

DO IT ! 2b Bond Redemption

R & B Inc. issued $500,000, 10-year bonds at a discount. Prior to maturity, when the
carrying value of the bonds is $496,000, the company redeems the bonds at 98. Prepare
the entry to record the redemption of the bonds.
Bonds Payable 500,000
Discount on Bonds Payable 4,000
Gain on Bond Redemption 6,000
Cash ($500,000 x 98%) 490,000

Accounting for Long-Term Notes Payable

• May be secured by a mortgage that pledges title to specific assets as security for a loan
• Typically, terms require borrower to make installment payments over term of loan
• Each payment consists of interest on unpaid balance of loan and a reduction of
loan principal
• Companies initially record mortgage notes payable at face value

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Long-Term Notes Payable

Illustration :

Porter Technology Inc. issues a $500,000, 8%, 20-year mortgage note on December 31,
2020, to obtain needed financing for a new research laboratory. The terms provide for
annual installment payments of $50,926 (not including real estate taxes and insurance).

The next illustration shows the installment payment schedule for the first four years.

(B) (c) (D)

(A) Interest Reduction of Principal
Interest Cash Expense Principal Balance
Period Payment (D) X 8% (A) – (B) (D) – (C)
Issue date $500,000
1 $50,926 $40,000 $10,926 489,074
2 50,926 39,126 11,800 477,274
3 50,926 38,182 12,744 464,530
4 50,926 37,162 13,764 450,766

ILLUSTRATION 15.14 : Mortgage installment payment schedule

(B) (c) (D)

(A) Interest Reduction of Principal
Interest Cash Expense Principal Balance
Period Payment (D) X 8% (A) – (B) (D) – (C)
Issue date $500,000

1 $50,926 $40,000 $10,926 489,074

2 50,926 39,126 11,800 477,274

Prepare the entries to record the mortgage and first payment. dec 31,2020
Cash 500,000
Mortgage Payable 500,000
---------------------------------------------------------------------------------------------------------------------------------------------------
Interest Expense 40,000 dec 31,2021
Mortgage Payable 10,926
Cash 50,926

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DO IT ! 3 Long-Term Notes

Cole Research issues a $250,000, 6%, 20-year mortgage note to obtain needed
financing for a new lab. The terms call for annual payments of $21,796 each. Prepare
the entries to record the mortgage loan and the first payment.
Cash 250,000
Mortgage Payable 250,000
----------------------------------------------------------------------------------------------
Interest Expense ($250,000 x 6%) 15,000
Mortgage Payable 6,796
Cash 21,796

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Analyzing Long-Term Liabilities

Use of Ratios :

Illustration :

General Motors reported total liabilities of $141,653 million, total assets of

$177,677 million, interest expense of $403 million, income taxes of $228 million,
and net income of $4,018 million.

Total Liabilities ÷ Total Assets = Debt to Assets Ratio

$141,653 ÷ $177,677 = 80%

The higher the percentage, the greater the risk that the company may be unable to
meet its maturing obligations.
Illustration :

General Motors reported interest expense of $403 million, income taxes of $228
million, and net income of $4,018 million.

Net Income +
Interest Times Interest
Interest Expense + ÷ =
Expense Earned
Income Tax Expense

$4,018 + $403 + $228 ÷ $403 = 11.5 times

Times interest earned indicates the company’s ability to meet interest payments as
they come due.

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