Bond a formal unconditional promise, made under seal, to pay a specified sum of money at a determinable future date, and

d to make periodic interest payment at a stated rate until the principal sum is paid. Bond Indenture contractual agreement between the issuer and investor (DEED OF TRUST) Registrar/disbursing agent usually the bank Types of bonds: 1. a. Term bonds single maturity b. Serial bonds series of maturity dates 2. a. Mortgage bonds secured by mortgage on REAL property b. Collateral Trust bonds secured by stocks and bonds of other corporation c. Debenture bonds without collateral 3. a. Registered bonds require the registration of the name of the bondholders b. Coupon or bearer bonds 4. Convertible bonds can be exchanged for shares of the issuing entity 5. Guaranteed bonds another party promises to make payment if borrower fails to do so 6. Callable bonds may be called in for redemption prior to maturity date. 7. Junk bonds high risk, high yield bonds issued by entities that are HEAVILY INDEBTED. Two approaches for accounting for issuance and authorization of bonds: 1. Journal entry 2. Memorandum *bonds are sold at premium if effective rate<nominal rate Nominal interest rate rate appearing on the face of the bond certificate Effective rate market rate Bond issue costs (Transaction Costs) not an outright expense but amortized over the life of the bond (credited to interest expense when amortized) a. b. c. d. incremental costs that are directly attributable to the issue of bonds payable such as: Printing and engraving cost Legal and accounting fee Registration with regulatory committees Commission to agents

Quick notes on BOND LIABILITY Reference: Financial Accounting -2 by Conrado T. Valix and Christian Valix

Sinking fund fund set aside for the liquidation of long term debt. If the related bond payable is due to be settled within 12 months, the sinking fund shall be reclassified as current asset

Bond retirement prior to maturity date *Total cash payment = retirement price + accrued interest *Gain/loss = retirement price + book value of the bonds *Retirement price>BV of the bonds loss Treasury bonds Face Value of Treasury bonds + Applicable premium (debited) Book Value Less: Reacquisition price Gain on acquisition Reacquisition price + Accrued interest (debited to interest expense) Total Cash Payment

Quick notes on BOND LIABILITY Reference: Financial Accounting -2 by Conrado T. Valix and Christian Valix