Question

Accounting and reporting of a long-term liability: bonds issued at a discount.

Provide an overview of corporate bonds, including the reasons for why companies issue them. Cover some of the "W's": "what" bonds are, "why" companies issue them, "who" buys them, and "where" they are issued/sold.

Identify and define the first account that is used to account for bonds issued at a discount. Provide the attributes of this main account. Conclude by describing the business transactions that increase and decrease that account.

Identify and define the second account that is used to valuate the first account. Next, provide the attributes of this second account. Last, explain the business transactions that increase and decrease this account.

State how a company reports bonds issued at a discount on the balance sheet. Give the specific mechanics of this balance sheet presentation. Conclude your by reasoning why bonds issued at a discount are reported in this manner. Address how this presentation adds to the transparency of financial statements, or how it helps readers understand the company better.

Answer 1

A bond is a debt obligation, like an Iou. Investors who buy corporate bonds are lending money to the company issuing the bond. In return, the company makes a legal commitment to pay interest on the principal and, in most cases, to return the principal when the bond comes due, or matures. to understand bonds, it is helpful to compare them with stocks. When you buy a share of common stock, you own equity in the company and will receive any dividends declared and paid by the company. When you buy a corporate bond, you do not own equity in the company. You will receive only the interest and principal on the bond, no matter how profitable the company becomes or how high its stock price climbs. But if the company runs into financial difficulties, it still has a legal obligation to make timely payments of interest and principal. the company has no similar obligation to pay dividends to shareholders. In a bankruptcy, bond investors have priority over shareholders in claims on the company’s assets. like all investments, bonds carry risks. one key risk to a bondholder is that the company may fail to make timely payments of interest or principal.