Question
In: Accounting
Company A and Company B both issued $10 million in term bonds on the same day...
Company A and Company B both issued $10 million in term bonds on the same day with the same maturity date. Yet, the beginning book value of the reported liability differed between the companies – correctly. Why would the same bond amounts with the same maturity date be reported at differing amounts? How are bond prices computed?
Solutions
Expert Solution
The computation of issue proceeds of bond depends on the stated rate of interest and market rate of interest. The present value of bonds payable face value and present value of interest payments is calculated to get the issue proceeds of the bond. If the issue price of bond is lower than face value of bond the bonds are issued at discount and if the issue price of bond is higher than face value of bond the bonds are issued at premium.
Impact of market interest rate on bonds
· If the market interest rate is equal to stated rate of interest on bond , the bonds are issued at par
· If the market interest rate is higher than stated rate of interest on bond , the bonds are issued at discount
· If the market interest rate is lower than stated rate of interest on bond , the bonds are issued at premium
Based on above and stated rate of interest the Company A and Company B can report different amount in financial statements for bonds payable.
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