Amortizing the bonds discount or premium

The straight-line method or the effective-interest method can be used to amortize the bond discount or premium. As we noted, if there are material differences between the two methods, the effective-interest method should be used. However, for ease of illustration, we will use the straight-line method in this article. Regardless of which method is used, …

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Accounting for the acquisition of bonds

Accounting for bonds by the investor is similar to that by the issuer, except that the investor records an asset, Investment in Bonds, rather than a liability, Bonds Payable. The Investment in Bonds account can be classified as either a current asset or a long-term investment, depending on the marketability of the bonds and management’s …

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Straight-line Method of Amortization

The Straight-line Method of Amortization – Definition The straight-line method of amortization simply allocates the discount evenly over the life of the bond. There is a constant interest charge each period. An entry is usually made on every interest date, and if necessary, an adjusting journal entry is made at the end of each period …

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Retirement of Bonds and Sinking Fund

Bonds can be retired in a number of ways, including repayment at maturity, early extinguishment of the debt before maturity, and conversion into common stock. Accounting for Retirement of Bonds Retirement of Bonds at Maturity When bonds are repaid at maturity, the journal entry is straightforward. Bonds Payable is, debited and Cash is credited, There …

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Issues Related to Bonds Payable

Besides the basic concept and procedures related to the issuance and subsequent accounting for bonds payable, there are other issues concerning bonds with which you should be familiar. Bonds Issued at a Premium or Discount between Interest Dates Bonds are likely to be sold between interest dates at either a discount or a premium. When …

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Effective Interest Method of Amortization

What is the effective interest method of amortization Under the effective interest method, a constant interest rate, equal to the market rate at the time of issue, is used to calculate periodic interest expense. Thus, the interest rate is constant over the term of the bond, but the actual interest expense changes as the carrying …

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Coupon versus Registered Bonds

Comparison between Coupon and Registered Bonds Some bonds are bearer or coupon bonds. This means that the bonds are not registered in the name of individual holders, but are negotiable by whoever holds them. In order to receive their interest payments, the current holders simply clip off a coupon and redeem it at an authorized …

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Term versus Serial Bonds

Term Bonds Definition Term bonds are bonds whose entire principal amount is due at a single date. Most corporate bonds are term bonds. Serial Bonds Definition Serial bonds have principal payments that are required at specific intervals. Serial bonds are often issued by state or local municipalities. Example To illustrate, assume that the city of …

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Early Extinguishment of Debt

What is meant by the Early Extinguishment of Debt? – Definition The retirement of debt before maturity is called the early extinguishment of debt. Early extinguishment of debt occurs whenever a firm’s long-term debt is retired before maturity. Management can accomplish this extinguishment by repurchasing the bonds in the market. Other bonds are callable and …

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Preference Shares

What are Preference Shares? Preference shares form a part of the share capital, but their holders do not possess the same status as ordinary shareholders. Though in theory both ordinary and preference shareholders are owners of the company, preference shareholders cannot claim to be the ‘real’ owners. The following features of preference shares will demonstrate …

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Issue of shares payable by installments

Explanation Companies usually used to issue the shares payable by installments. These installments were Application, Allotment, First Call, Second Call and Final Call. If there was only one call, it will not be named as the First Call. The word first, second and final were only used when there was more than one call. When shares …

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Issue of bonus shares

Explanation and journal entries The undistributed profit of the company or corporation is transferred to Profit and Loss Appropriation account or retained earning. If the directors decided that out of the profit of the corporation a portion may be divided among the shareholders, the journal entry would be: Profit and Loss Appropriation/Retained earning ——————Dr.   …

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Procedure for issuance of shares

Explanation and Steps The directors on behalf of the company take necessary steps to raise the capital as-soon-as the company gets the certificate of incorporation. These steps„ are briefly, described below: The directors of a. public limited company issue prospectus inviting the public to apply for the purchase of the shares of the company. The …

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Types of shares in a public limited company

Shares: The registered capital of a company is divided into fixed number of units. Each of these units is known as a Share. The company issues these shares in order to raise its capital. Types of shares: The shares of a company are of the following types: Ordinary Shares Preference Shares Deferred Shares. Ordinary or Common …

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Issuance of shares and debenture – MCQs

Take a quick Multiple Choice Questions (MCQs) test about Issuance of shares and debenture. These MCQs can help you to prepare for your exams, interviews and different tests. Just click the “start quiz” button and start issuance of shares and debenture MCQs quiz. If you find difficulty in answering these questions, read ‘Issuance of shares and …

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