Why do companies issue
A bondis abondissued by acorporation.
It is a bond that a corporation issues to raise money effectively in order to
expand its business. The term is usually applied to longer-term debt
instruments, generally with a maturity date falling at least a year after their
issue date. (The term "commercial paper" is sometimes used for
instruments with a shorter maturity.)
the term "corporate bonds" is used to include all bonds except those
issued bygovernmentsin their own currencies. Strictly
speaking, however, it only applies to those issued by corporations.
the determining factor of whether a bond is sold at a discount, face, or
If the market rate is greater than the bond'scontract rate,
the bond will be sold at a discount. If the market rate is less than the bond's
contract rate, the bond will be sold at a premium.
Regardless of whether the bond is sold at a premium or discount,
a company must list a "bond payable" liability equal to theface valueof the bond.
When calculating the present value of a bond, use themarket rateas the discount rate.
How are discounts and premiums recorded and shown
on the balance sheet?
The unamortized premium on bonds payable and
the unamortized discount on bonds payable will be presented with the related
bonds as liabilities on thebalance sheet. For example, if there is a premium on the bonds
that will come due in 13 years, both thebonds payableand the premium on bonds payable will be reported together as
a long-term liability. If the premium on bonds is associated with bonds that
will be due in 11 months (and the corporation will be using its working capital
to pay the bondholders), the premium and the bonds will be reported together as
discount on bonds payable will also cling to the bonds. If the bonds mature
more than one year from the date of the balance sheet, both the bonds and the
unamortized discount will be reported as a long-term liability. If the bonds
are due in less than one year (and will require the use of the corporation's
working capital), the discount and the bonds are reported as a current
premium and discount accounts are viewed asvaluation accounts. The unamortized premium on bonds payable will
have a credit balance that increases thecarrying amount(or the book value) of the bonds payable. The unamortized
discount on bonds payable will have a debit balance and that decreases the
carrying amount (or book value) of the bonds payable.
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