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Bonds that mature at a certain date.

secured- a bond with collateral

unsecured- a bond without callateral

A registered bond has a known owner.

A bearer bond is more risky b/c the owner is unknown.

Par Value

Discount

Premium

Present Face Value (FV) + Present value of Annuity of Interest Payments

JE for Issuance:

Jan 1        Cash      1,000,000
                          Bonds Payable      1,000,000

JE for Payment of Interest

June 30    Bond Interest Exp     50,000
                          Cash                                  50,000
          1,000,000 x 0.10 x 1/2 (yr) = 50,000

JE for Retirement of Bond

Dec 31      Bonds Payable      1,000,000
                           Cash                            1,000,000       

Debited

Par Value - Issuing Price of Bond (given) = discount

FV - Unamortized discount = Carrying Value at a Discount

1,000,000 - 73,595 = 926,405

FV
+
Interest Payments for 5 yrs (1,000,000 x 10% x 5)
=
Total to be Paid
-
Amt. received from Bondholders
=
Total Bond Interest Exp.

Example:
1,000,000
+
500,000
=
1,500,000
-
926,405
=
573,595

Bond Interest Exp      57,360
       Discount on Bonds Payable      7,360
       Cash                                              50,000

Cash:

1,000,000 x 10% x 1/2 = 50,000

Discount on Bonds Payable:

1,000,000 - 926,405 = 73,595 (rounded to 73,600) / 10 = 7,360

Bond Interest Exp

573,595 / 10 (rounded) = 57,360

False - Increases

Premium

Cash       1,081,145
            Premium on Bonds Payable       81,145
            Bonds Payable                              1,000,000

An "Adjunct Liability Account"

1)

1,000,000 + 500,000 (1,000,000 x 10% x 5) = 1,500,000

1,500,000 - 1,081,145 = 418,855

2)

Bond Interest Expense                  41,885
Premium on Bonds Payable         8,115
              Cash                                                      50,000

Premium on Bonds Payable / 10 = 8,115

Decreases

A,B, and C)

Bonds Payable       1,000,000
         Cash                          1,000,000

1) Record "Amortization of Premium" or "Amortization of Discount" (up to date)

2) Record Retirement of Bonds:

i.  Debit "Bonds Payable" (@ FV)
ii. Remove "Unamortized Premium" with Debit
or
Remove "Unamortized Discount" with Credit
iii. Record "Cash" (@ Retirement Price)
iv. Record "Gain on Retirement" with a Credit
or
Record "Loss on Retirement" with a Debit

B
L    G
P    D
       C

Carrying Value > Retirement Price = Gain

Carrying Value < Retirement Price = Loss

1. Governmental regulation
2. Corporation taxation
3. Income taxed twice

Sent to State gov.

State gov. issues a "Charter" and corporation is formed

Sent to State gov.

State gov. issues a "Charter" and corporation is formed

Sent to State gov.

State gov. issues a "Charter" and corporation is formed

-vote at stockholders meetings
-sell stock
-Pre-emptive right to purchase additional shares
-receive dividends, if declared
-share equally assets remaining after creditors are paid in a liquidation

Authorized - stock authorized by the state to sell to public

Issued - only the shares offered to the public

Outstanding - shares owned

Shares Issued but not Outstanding. 

Un-owned shares on the market.

typically have priority over common shares in:
-dividends distribution
-distribution of assets in case of liquidation

However,
-usually has a fixed return
-has no voting rights

-to raise capital without sacrificing control
-to boost the return earned by common stockholders through financial leverage
-appeals to investors who don't want a lot of risk

Cumulative:
Dividends in arrears must be paid before dividends may be paid on CS (most common)

Noncumulative:
Undeclared dividends from current and prior years do not have to be paid in future years

Participating vs. Nonparticipating
Part- dividends may exceed a stated amt. once common stockholders receive a dividend equal to the preferred state rate
Non- dividends limited to a max amt. each year. The max is usually the stated div. rate. (Most Pref. Stock is Nonparticipating)

Convertible
-right to be converted to fixed number of common shares

Callable
-issuing company can purchase or retire stock a specified future prices

Cash       120,000
       CS                                                          100,000
       Paid in Capital in excess of par         20,000

Land         50,000
Building   90,000
           CS         100,000
           PIC         40,000

Organization Exp        12,000
           CS                                   8,000
           PIC                                  4,000

Cash             300,000          
           Preferred Stock         250,000
           PIC Preferred             50,000

Retained Earnings       20,000
          Common Dividends Payable       20,000

NONE

Common Dividends Payable      20,000
           Cash                                                20,000