What is a Corporation? – Definition A corporation is a separate body, authorized by law, owned by one or more persons and having its own rights, privileges, and obligations distinct from those of its owner(s). In effect, under the Constitution, a corporation is a separate legal entity with a continuous life that has rights and …
How to define a lease? A lease is a contractual agreement between the lessor (the owner of the property) and the lessee (the user of property) that gives the lessee the right to use the lessor’s property for a specific period of time in exchange for stipulated cash payments. Accounting for leases has long been …
What is meant by a Mortgage Payable? A mortgage is a promissory note secured by an asset whose title is pledged to the lender. It is a form of long-term liability. Mortgages generally are payable in equal installments consisting of interest and principal. Accounting procedures To demonstrate the accounting procedures, assume that on January 2, …
Explanation Investors often sell bonds prior to their maturity. The sale is recorded by debiting Cash for the net proceeds received (sale price less commission and fees), The Investment in Bonds account is credited for the net carrying value of the bonds, and a gain or loss is recorded for the difference between the cash …
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, …
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 …
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 …
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 …
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 …
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 …
Accounting for bonds issued at a premium To show how to account for bonds issued at a premium, we wül now assume that on January 2, 2020, the Valenzuela Corporation issues $100,000, 5-year, 12% term bonds. Interest is payable semiannually on January 2 and July 1. In this case, however, the bonds are issued when …
As we know, bonds are also issued at other than face value, i.e. above or below their face value. If the prevailing market interest rate is above the stated rate, the bonds will be issued at a discount. conversely, if the prevailing interest rate is below the stated rate, the bonds will be issued at …
Bonds will be issued at par or face value if the stated interest rate equals the prevailing rate for similar investments at the issue date. Because bonds can be issued on an interest date or between interest dates, both cases will be discussed. Bonds Issued on an Interest Date If bonds are issued at par …
Comparison between Secured and Unsecured Bonds Unsecured bonds, called debentures, are issued without any security to back them. Investors purchase them based on the creditworthiness of the company. Some bonds arc secured by the borrower’s collateral or specified assets. These secured bonds are often referred to as mortgage 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 …
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 …
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 …
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 …
What are bonds or debentures? – Definition A corporation or company generally borrow money by means of issuing debentures or bonds. A debenture or bond is a written acknowledgment by a company or corporation of a loan made to it. It is issued to money lenders under the seal of the corporation. It contains a …
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 …
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. …
Definition and explanation The shares may a!so be issued at a discount, that is to say at a price less than the face value. It shall be lawful for a company to issue shares at a discount, provided that: The issue of the shares at a discount must be authorized by resolution passed in the …
Definition and explanation Sometimes a company issues its shares at premium, that is to say, at a higher price than the face value, provided there is a public demand for such shares at a higher value. The premium received on issue shares must not be mixed with the share capital but must be credited to separate …
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 …
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 …
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 …