Effect of Debt Transactions
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The three typical accounting events associated with borrowing money through a bond issue are:
1. Exchanging the bonds for cash on the day of issue.
2. Making cash payments for interest expense and recording amortization when applicable.
3. Repaying the principal at maturity.
Required
A. Assuming the bonds are issued at face value, show the effect of each of the three events on the financial statements, using a horizontal statements model like the following one. Use + for increase, - for decrease, and NA for not affected.
EXAMPLE (as metioned above)
Event | Assets = Liab. + Equity | Rev. - Exp. = Net Inc. | Cash Flow
No.
1
B. Repeat the requirements in Requirement a, but assume instead that the bonds are issued at a discount.
C. Repeat the requirements in Requirement a, but assume instead that the bonds are issued at a premium.
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Solution Summary
The solution expains the effect of debt transactions on financial statements. Repaying the principal in maturity are examined.
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