Issue and Redemption of Long-

term Liabilities

ISSUE OF LONG-TERM LIABILITIES
(E.G. BONDS)
Long-term Liabilities
A liability is an obligation of the business to
pay cash for goods or services taken on credit
or for money borrowed.
Liabilities can be classified as either current or
long-term.
Current liabilities
Obligations that fall within the coming year
e.g. accounts payable, owing on rent etc, bank
overdraft
Long-term liabilities
Obligations due beyond one year.
E.g. bonds, notes payable and mortgage
Bonds
Projects that demand large amounts of money
often are funded from bond issuances.
Which are essentially loans from the general
public.
Both private and public sector organisations
may use issue of bonds.
What is a bond?
A bond is its issuers written promise to pay
back an amount borrowed upon maturity plus
interest at specified times.
A bond is a debt owed by the enterprise to the
bondholder.
Example of a Bond
Advantages of bonds
Bonds do not affect owner control (equity
financing affects ownership of a company but
bonds financing do not).
Interest on bonds is tax deductible

Disadvantages of bonds
The business is obligated to pay back the bond
on maturity and pay interest throughout the
life of the bond
Creditors such as bond holders have a claim
on the business.
Issuance of Bonds
Bonds may be sold to the public at par or no
par (discount or premium).
(but we will focus on at par.
Bond issue price and rate of return
The issue price of bonds is dependent on the
dominant rate.
There is the contractual rate of interest which
is stated on the bond certificate and there is
the market rate of interest which represents
the rate of return demanded by investors.
When the MARKET RATE equals the stated
rate the bond will be issued at face or par
value.
The bond will sell at Par value when the
market rate = contractual rate.

Case 1 - Issuing bonds at par

Grace Co. Ltd is issued $800 000 of 9%, 10
year bonds dated January 1, 2011, that
matures on December 31, 2021 and pay
interest semi-annually on each June 30 and
Dec. 31.
Task: show the relevant journal entries
Case 2
On Jan 1, 2013, the Dash Corporation issued
$1000 000 par value, of 10 year, 10% bonds.
The bonds annual interest payments becomes
payable on every December 31.
Required: the relevant journal entries
REDEMPTION OF LONG-TERM
LIABILITIES E.G. BONDS
Bonds and Sinking Funds
When debentures or bonds are issued
consideration should be given to having the cash
pay off the debt instruments upon maturity!
Therefore, when a bond is issued, the issuer
creates a sinking fund (reserve) to provide the
necessary funds at redemption.
The sinking funds assures investors that enough
money will be available to repay the bonds and
other debt instruments upon maturity
template
The Journal

Date Details Debit$ Credit $
Bonds sinking fund
cash
X xxxx xxx
X xxxx xxx
To record annual installments to sinking
fund
Cash
Sinking fund investment income
X xxx


X xxx
Being sinking funds earnings

Bonds payable
Bonds sinking fund
X xxxx xxx


X xxxx xxx
The payment of bonds upon maturity

Case1 Redemption of bonds
On December 31, 2013, Jesu Inc issued $2
000 000 par value 8% 5-year bonds. The bonds
contract calls for a sinking fund to be maintained
thoughout the life of the bond. The company is
to make five annual payments of $327 595 to the
fund beginning December 31, 2014. The fund
will earn a net return of 10%.
Task: the relevant journal entries for the
redemption of bonds
Case 2
Margo Inc
See handout