Financial Accounting: In an Economic Context

BONDS PAYABLE

Companies issue bonds to raise large amounts of capital, usually to finance expensive, long-term projects. For example, AT&T raised over $12.4 billion through bond issuances in 2008. Proceeds were used for working capital, capital expenditures, debt repayments, and acquisitions.

Bonds are normally sold to the public through a third party (called an underwriter), such as an investment banker or a financial institution.⁸ They are usually interest-bearing notes that involve formal commitments requiring the issuing company to make cash interest payments to the bondholder and a principal payment (usually in the amount of $1,000 per bond) when the bond matures, normally between five and thirty years from the date of issuance. After bonds are initially issued, they are generally freely negotiable; that is, they can be purchased and sold in the open market. Both the New York and the American Security Exchanges maintain active bond markets.

7. Instead of the effective interest method, some companies amortize discounts on long-term obligations (e.g., notes and bonds) using the straight-line method. That is, they amortize equal amounts of the discount into interest expense during each period of the note's life. According to generally accepted accounting principles, the straight-line method is acceptable only if it results in numbers (i.e., interest expense and book value of the note payable) that are not materially different from those produced by the effective interest method. ...