Accounting theory and practice, Volume 2 (of 3) : a textbook for colleges and…

At the close of a fiscal period which does not coincide with the bond interest period, not only must the bond interest accrued to date be shown as an accrued expense, but also there must be so shown the portion of the premium (or discount) accrued to that date required to bring the bond interest cost down to the effective basis. Presentation on Balance Sheet The final problem in connection with bonds concerns the manner of their showing on the balance sheet. That has perhaps been sufficiently indicated. The amount of the authorized issue should be short-extended, and the amount unissued subtracted therefrom with the net amount outstanding full-extended as the significant figure in the balance sheet. Other Fixed Liabilities _Real Estate Mortgages._ Another item among the fixed liabilities is the simple real estate mortgage. This is usually called a bond and mortgage, the bond being simply the promise to pay and the mortgage being the security for the amount of money borrowed. In some states the more formal document called the bond is used as a contract according to which a named sum is to be paid in case the amount borrowed on the mortgage is not paid. This named sum is usually the amount borrowed, although in some states it is twice this amount. In booking a note or bond supported by a mortgage, the customary title is “Mortgage Payable” rather than “Notes Payable” which is generally understood to be applicable in the main to current liabilities. In case the double amount is named in the bond, it is not customary to take cognizance of the contingent liability thereunder. _Loans on Collateral._ Short-time loans are frequently made on collateral security. Stocks and bonds, particularly of the borrowing company or its subsidiaries, may also be made the basis of a long-time loan. This may take the form of a bond issue, promissory notes, or other similar obligations. Accounting for the loan and its showing on the balance sheet follow the principles already laid down. The title of the loan account should carry the word “Collateral” or other similar term to show its nature. Accounting for the collateral is usually accomplished by a memorandum in the stocks, bonds, or investments account to show exactly what securities have been withdrawn for deposit as collateral. No further record is needed other than a complete list of such securities; the securities are still owned by the company, though deposited under a conditional contract with someone else. If the loan is dishonored at maturity and the securities are sold in satisfaction thereof, the necessary entries must be made to show the sale of the securities, the profit or loss attendant thereupon, and the repayment of the loan. In showing the pledged securities on the balance sheet, it is well to present the securities in two groups or classes, viz., those pledged as collateral for the loan shown contra and those not so pledged. _Short-Term Securities._ When the market is not favorable to the issue of long-term securities, because of the high rate of return demanded by investors, corporations often have recourse in their borrowings to short-term securities—usually note issues with maturities ranging from one to five years, two- and three-year terms being the commonest. The financial consideration in their issue is merely a speculation that by the time of their maturity the market will be more favorable for the flotation of long-term securities. Thus the company hopes at the maturity of the notes to free itself from the need of paying so high an interest rate as it is required to pay now for the short-term securities. These notes may be in different denominations and are accounted for just as other notes. On the balance sheet they are grouped with the fixed liabilities until within a short time of maturity, when they must be shown with the other current items.