FA II - Chapter 2 & 3 Part II
FA II - Chapter 2 & 3 Part II
FA II - Chapter 2 & 3 Part II
14-1
Accounting for Serial Bonds
Case 1: Bonds are issued to yield 9%
a. Proceeds of bond issue = PV (I) + PV (P)
A B A+B A+B (1+i)-n
Interest Principal Total Discount Present
End of Due Due Amount Due Factor (9%) value
2006 50,000 50,000 100,000 0.917 91,700
2007 45,000 50,000 95,000 0.842 79,990
2008 40,000 50,000 90,000 0.772 69,480
2009 35,000 50,000 85,000 0.708 60,180
2010 30,000 50,000 80,000 0.650 52,000
2011 25,000 50,000 75,000 0.596 44,700
2012 20,000 50,000 70,000 0.547 38,290
2013 15,000 50,000 65,000 0.502 32,630
2014 10,000 50,000 60,000 0.460 27,600
2015 5,000 50,000 55,000 0.422 23,210
Totals 275,000 500,000 775,000 519,780
Proceeds of Serial Bond issue @ 9% yield 519,780
14-2
Accounting for Serial Bonds
b. Premium on bond issue
Total proceeds……………………………………$519,780
Face value……………………………………………500,000
Premium…………………………………………......19,780
14-3
Accounting for Serial Bonds
d. Premium amortization table for the serial bonds using the interest method
A B C D
Year Carrying Interest Interest Premium Bond Cumulative
Amount Expense Payment Amortization Premium Bal. Principal
(9%*CV) (10%*FV) (C-B) (BB-D) Payment
Issue 519,780 - - - 19,780 -
2006 466,560 46,780 50,000 3,220 16,560 50,000
2007 413,550 41,990 45,000 3,010 13,550 100,000
2008 360,770 37,220 40,000 2,780 10,770 150,000
2009 308,239 32,469 35,000 2,531 8,239 200,000
2010 255,981 27,742 25,000 2,258 5,981 250,000
2011 204,019 23,038 20,000 1,962 4,019 300,000
2012 152,381 18,362 15,000 1,638 2,381 350,000
2013 101,095 13,714 10,000 1,286 1,095 400,000
2014 50,194 9,099 5,000 901 194* 450,000
2015 - 4,517 483* - 500,000
*Rounding up difference
14-4
Accounting for Serial Bonds
Journal entry to record the retirement of the first serial bond and
the payment of the first interest for 1996:
Bonds payable……………………….53, 220
Bond Interest Expense…………….46,780
Cash 100,000
Case 2: Bonds are issued to Yield 11%
a. Proceeds of bond issue = PV (I) + PV (P)
14-5
Accounting for Serial Bonds
A B A+B (1+i)-n A+B (1+i)-n
Interest Principal Total Amount Discount Present
End of Due Due Due factor (11%) value
1996 50,000 50,000 100,000 0.901 90,100
1997 45,000 50,000 95,000 0.812 77,140
1998 40,000 50,000 90,000 0.731 65,790
1999 35,000 50,000 85,000 0.659 56,015
2000 30,000 50,000 80,000 0.593 47,440
2001 25,000 50,000 75,000 0.535 40,125
2002 20,000 50,000 70,000 0.482 33,740
2003 15,000 50,000 65,000 0.434 28,210
2004 10,000 50,000 60,000 0.391 23,460
2005 5,000 50,000 55,000 0.352 19,360
Totals 275,000 500,000 775,000 481,380
Proceeds of Serial Bond issue @ 11% yield 481,380
14-6
Accounting for Serial Bonds
14-7
Accounting for Serial Bonds
Year Carrying Interest Interest Discount Bond Cumulative
Amount Expense Payment Amortization Discount Principal
(11%) (10%) Balance Payment
Issue 481,380 - - - 18,620 -
1996 434,332 52,952 50,000 2,952 15,668 50,000
1997 387,109 47,777 45,000 2,777 12,891 100,000
1998 339,691 42,582 40,000 2,582 10,309 150,000
1999 292,057 37,366 35,000 2,366 7,943 200,000
2000 244,183 32,126 25,000 2,126 5,817 250,000
2001 196,043 26,860 20,000 1,860 3,957 300,000
2002 147,608 21,565 15,000 1,565 2,392 350,000
2003 98,845 16,237 10,000 1,237 1,155 400,000
2004 49,718 10,873 5,000 873 282* 450,000
2005 - 5,469 496* - 500,000
*Rounding up difference
e. Journal entry to record the retirement of the first serial bond and
the payment of the first interest for 1996:
Bonds payable [50000-2952]……47048
Bond Interest Expense…………..52,952
Cash………………………………… 100,000
14-8
VI. Special Issues Related To
Non-current Liabilities
14-11
Extinguishment with Cash before Maturity
14-13
Exchanging Assets
14-15
Extinguishment with Modification of Terms
14-16
Modification of Terms
Illustration: On December 31, 2015, Morgan National Bank enters
into a debt modification agreement with Resorts Development
Company. The bank restructures a ¥10,500,000 loan receivable
issued at par (interest paid to date) by:
► Reducing the principal obligation from ¥10,500,000 to
¥9,000,000;
► Extending the maturity date from December 31, 2015, to
December 31, 2019; and
► Reducing the interest rate from the historical effective rate of
12 percent to 8 percent. Given Resorts Development’s
financial distress, its market-based borrowing rate is 15
14-17 percent.
Modification of Terms
14-18
Modification of Terms
14-19
Modification of Terms
14-20
VII. Presentation and Analysis
14-21