BONDS Flashcards
how to calculate interest payable for an interest period for a bond when using effective interest rate method of bond amortisation when the bond is issued at a premium
FV Of the bond × contractual or stated rate
Interest expense under bond using effective interest rate method of bond ammortisation.
Book value × Market interest rate.
This might be less or more than the stated rate. Might be issued at a premium or discount.
Eg y1 FV×SR = 100000×8%= 8000
y2 FVXCR = 90000X10% = 9000
10 year bond. Calc interest exp @ y 2
Interest expense is calculated using effective interest rate method.
9k-8k = 1k difference is recognised but not paid so it is added to the principal amount for y2.. New P = 91k
In y2 int paid is 8K
Interest exp = 91Kx10%=9100
Bond can be issued at a premium or discount.
If premium - SR>MR so interest expense decrease and when a bond is issued at discount SR<MR interest expense increases.
If the bond is not held to maturity how is it recorded in the balance aheet
At the fair value of the bond
Term bond and serial bond.
A term bond has a single maturity date.
Serial bond matures in staggered intervals.
Mar 1 2017.. Bond of 100000 was issued at 103. Bond premium is 3000. Bond is due in 5 years. If straight line method is used what is the bond liability on dec 31 2017.
Bond liab for 10 months. Premium due 3000 for 5 years. For 1 year - 3000/5 = 600/12 = 50 per month so 50x10 = 500 for 10 months. So bond liability at the end of 31/12/2017 = 103000-500 = 1,02,500
Cash in Bond sinking fund. Is it recognised as cash and cash equivalent.
No. bond sinking fund is a long term asset. Even if it is cash it will be used to retire bonds which are long-term liabilities.
For which of the following calculation of PV unnecessary.
1. Issuance of non interest bearing note.
2. Selling of 8% bonds to yield 10%
3. Selling of 8% bonds to yield 8%
4. Selling of 8% bonds to yield 5%
Selling of 8% bonds to yield 8% doesnt need PV to be calculated since calculated PV is same as FV of the bond.
