Quick Study Sheet

Bonds Payable–

Borrow from investors who invest in the bond to earn interest income

Maturity Value:
Amount that must be repaid (usually in $1,000s)

Maturity Date:
Date the maturity value amount must be repaid

Stated Interest Rate:
Amount paid as interest, periodically

Market Yield/Effective interest rate:
The actual interest expense the company really incurs,

Regardless of what is paid at the beginning, the face value must be paid at maturity date
Discount: Cash exchanged is less than face value
Premium: Cash exchanged is more than face value

Determining the price of the bond:
A bond that trades at 98 means: 98% (.98) x the maturity value invested in = price

If the bond price is not stated, it can be calculated using the effective interest rate, the number of periods until maturity, and the coupon rate.

Total periodic coupon payment**
x present value factor of an annuity

+ Maturity value x
present value factor of a single amount

= Amount paid now to get the effective interest rate return on your money

Journal Entries related to the bond payable:
Cash
      Premium/Discount
           Bonds Payable

Interest Expense
     Premium/Discount
           Cash

Amortization Table:

Long – Term Installment Loans / Notes Payable / Mortgage Payable:

Borrow money from bank, must repay periodically in equal payments.
The payments include interest expense and repayment of principle

Format of amortization schedule

						                         Difference:		     Amount Owed
Date		    Payment	      Interest 10 %        to repay principle	    (Carrying value)

Journal entries:

Borrow:

Cash
           Note Payable

Payments:

Interest Expense
Notes Payable
               Cash