SAAM glossary Office of Financial Management

The state accounts for general long-term obligations in the General Long-Term Obligations Subsidiary Account and reports them in the governmental activities column in the Government-wide Financial Statement of NET POSITION. DUE FROM OTHER FUNDS – An asset account reflecting amounts owed to a particular fund by another fund in the same agency for goods sold or services rendered. This account includes only short-term obligations on open account and not non-current portions of long-term loans.

REGISTER – A record for the consecutive entry of events, documents, or transactions, with proper notation of all the required information. The form is designed so that the entries are distributed, summarized, and aggregated for convenient posting to the accounts. RECEIVABLES – Amounts due from private persons, businesses, agencies, funds, or governmental units that are expected to be collected in the form of moneys, goods, and/or services. The resources held under these arrangements are not available to support the government’s own programs.

Under what circumstances might a 10-year bond be classified as a current liability?

A bond is a liability companies use when a large amount of cash is needed. Rather than go to a bank or other lender, a company will issue bonds and sell them to the public. By selling bonds on the open market, the company has more control over the terms of the liability, such as interest rate and duration.

• Evermaster therefore makes the following entries on July 1, 2015, to record the interest payment and the premium amortization.
• Reimbursement for lodging at a private residence not meeting the criteria above is not allowed.
• The performance audit function provides an independent review of management’s performance and the degree to which actual performance meets pre-stated goals.
• For instance, mortgage bonds are backed by specific real estate assets.

For reporting purposes, depending upon the nature of component unit and its relationship with the state, financial data may be either discretely presented or blended. CERTIFICATE OF PARTICIPATION – A debt financing program administered by the Office of the State Treasurer. A COP is an instrument evidencing a pro rata share in a specific pledged revenue stream, usually lease payments by the issuer that are subject to annual appropriation. The certificate generally entitles the holder to receive a share, or participation, in the lease payments from a particular project.

Bonds issued at face value on an interest date

MUSEUM AND HISTORICAL COLLECTIONS – An individual item or group of items of historical or natural history significance. These items could be located in state museums or in any state agency.

Since the outstanding principal of a bond is not paid until maturity, the interest payment is always the same. The difference between the amount of cash received and the liability is called Discount on Bonds Payable. Since Discount on Bonds Payable is a contra-liability, the normal balance is a debit. This makes sense because we need something to add to Cash on the debit side to balance out the $400,000 Bond Payable. Bondholders Are bonds payable reported as a current liability if they mature in six months? receive the stated rate times the principle, so they would receive $6,000. Because interest is calculated based on the outstanding loan balance, the amount of interest paid in the first payment is much more than the amount of interest in the final payment. The pie charts below show the amount of the $1,073.64 payment allocated to interest and loan reduction for the first and final payments, respectively, on the 30-year loan.

How to Account for Notes Payable

A $400,000, semiannual 8% bond will require the same amount of cash for the interest payment whether it is sold at par, a discount or a premium. Only the interest expense is affected by the discount or premium. If the bonds were repaid on December 31, 2013, the company would be required to repay the bonds plus $2,667 in interest.

• ____ The maturity value of a bond is amount that the company will need to repay.
• Valley collected $5,000 from the bondholders on May 31 as accrued interest and is now returning it to them.
• Thus, the first annual mortgage payment reduces the outstanding mortgage principal balance by $15,576 from $1,000,000 to $984,424.
• For an investment, ancillary costs include legal fees and commissions and are included as part of the cost of the investment.
• In accounting for depreciation, the cost of a capital asset, less any salvage value, is prorated over the estimated useful life of such an asset.

For example, if an investor receives $1,000 of interest and is in the 25% tax bracket, the investor will have to pay $250 of taxes on the interest, leaving the investor with an after-tax payment of $750. With municipal bonds, interest payments are exempt from federal tax. So the same investor receiving $1,000 of interest from a municipal bond would pay no income tax on the interest income. This tax-exempt status of municipal bonds allows the entity to attract investors and fund projects more easily. When a company issues bonds, they make a promise to pay interest annually or sometimes more often. If the interest is paid annually, the journal entry is made on the last day of the bond’s year. If interest was promised semiannually, entries are made twice a year.

What is Long Term Debt?

For the first year, the principal balance is the original issuance price of $977,714. The yield rate decided by the two parties was 6 percent so the interest to be recognized is $58,663 . As shown in the above entry, the cash interest paid is only 5 percent of the face value or $50,000. The extra interest for the period ($8,663) is compounded—added to the principal of the bond payable. Once again, the bond payable balance has been raised to $20,000 at the end of the second year ($17,800 + $1,100 + $1,100) and total interest expense over the life of the bond equals the $2,200 discount ($1,100 + $1,100). However, a question should be raised as to whether the information reported under this method is a fairly presented portrait of the events that took place.

• Both the effective-interest and straight-line methods result in the same total amount of interest expense over the term of the bonds.
• Illustration shows the computation of the partial amortization, using the effective-interest rate of 6 percent.
• That additional cash helps to offset the amount the company pays in effective interest.
• Bonds are secured when specific company assets are pledged to serve as collateral for the bondholders.
• Each time interest payment is made, a portion of the discount or premium must be included in the entry.

This feature allows the borrower to repay the bonds before their scheduled maturity date at a specified call price, usually at an amount just above face value. Callable bonds protect the borrower against future decreases in interest rates. If interest rates decline, the borrower can buy back the high-interest-rate bonds at a fixed price and issue new bonds at the new, lower interest rate. A bond is a formal debt instrument that obligates the borrower to repay a stated amount, referred to as the principal or face amount, at a specified maturity date. In return for the use of the money borrowed, the borrower also agrees to pay interest over the life of the bond.

AccountingTools

Note that the amounts for the June 30, 2018, and the December 31, 2018, semiannual interest payments shown in the previous slide can be taken https://simple-accounting.org/ directly from the amortization schedule. In this slide we assume the market interest rate is 7%, the same as the stated interest rate.

Many companies are not able to borrow money unless some additional security is provided for the creditor. Any reduction of risk makes a note or bond instrument more appealing to potential lenders. For example, some loans are mortgage agreements that provide the creditor with an interest in identified property.

Introduction to Bonds

For example, if the interest rate offered by the company is too low, the public may not be interested in buying the bonds. If the market believes that the company may not pay back the bonds, the market will demand a higher interest rate. One of the entries that you will prepare involves the upcoming bond interest payment that will be paid on January 15 of the next year. Your supervisor asks you if you will consider dating the journal entry on January 1 instead of December 31 of the current year.

The Board has now clarified that – when classifying liabilities as current or non-current – a company can ignore only those conversion options that are recognised as equity. To record bond interest payment.This entry records $1,000 interest expense on the $100,000 of bonds that were outstanding for one month. Learn the definition and examples of current liabilities, and why they are important. Discover the difference between current assets, and current liabilities. Net liquid assets is a measure of an immediate or near-term liquidity position of a firm, calculated as liquid assets less current liabilities. Current Assets is an account on a balance sheet that represents the value of all assets that could be converted into cash within one year.