Principles of accounting

by La Salle Extension University

This historic book may have numerous typos and missing text. Purchasers can download a free scanned copy of the original book (without typos) from the publisher. Not indexed. Not illustrated. 1921 ...the two kinds of interest rate. The nominal interest rate is the one indicated on the face of the bond. The effective or real interest rate is the actual rate of return on the investment and is roughly obtained by dividing the annual cash income by the actual cash investment. In the last example shown above the nominal interest rate was 6%, and the effective interest rate was 5%. The reader should have no difficulty in realizing that if he buys a bond for less than the par value, which guarantees a fixed yearly rate, the annual rate of interest on his actual investment will be greater than the nominal interest specified on the face of the bond. The company issuing a bond must book it at par value, since the par value always constitutes the real ultimate liability. The entry to Cash for the proceeds of the bond sale will probably be either more or less than the credit to the Bond Account, since we have seen that few bonds are really sold at exactly par. The difference between the liability thus set up and the cash received must certainly be recorded on the books. This can best be illustrated by a series of examples. Suppose a company has the following balance Balance Sheet Cash $ 4,000.00 Plant 50,000.00 Other Assets 20,000.00 $74,000.00 Accounts Payable $15,000.00 Capital & Surplus 59,000.00 $74,000.00 The company decides to sell bonds in order to raise money for an extension of its plant. After proper legal formalities, it issues $25,000.00 worth of 5% ten-year bonds. Let us suppose that it is able to sell these bonds for only $20,000.00. Cash will be debited $20,000.00, Bonds Payable will be credited $25,000.00, and $5,000.00 entry will have to be made to the debit of a new account which we may call "Discount on Bonds." The journal en...

94 pages, Paperback

Published January 1, 2012