Question

Question: If you were the CFO of a company who is responsible for issuing a corporate bond, how could issuing a premium bond help the company in terms of the impact on financial statement? Which statement could be affected the most? Write a paragraph of 100 words by keeping the class lecture in mind. Submit the response in unit 7 under learning activity via word file.

Answer 1

When companies need to raise money, issuing bonds is one way to do it. A bond functions as a loan between an investor and a corporation. The premium on bonds payable is the difference between the amount received by the corporation issuing the bonds and the par value of the bonds, where the amount received is greater than the par value. Bond transactions affect flows and shareholders' equity reports. Bond transactions affect an income statement through two the interest expense and amortization expense accounts. The premium on bonds payable that has not yet been amortized to interest expense will be reported immediately after the par value of the bonds in the liabilities section of the balance sheet. Interest payments as well as principal remittances and issuance proceeds is reported in operating cash flows and financing cash flows, respectively. Bond issuance affects this financial synopsis through interest and amortization expenses, both of which decrease net income and ultimately flow into the retained earnings account, which is an equity item.