Bonds

Question 1

What is interest payable on bonds?

Answer 1

Face amount x stated rate (aka contractual rate or coupon rate)

Question 2

What is the annual interest expense on bonds?

Answer 2

Carrying amount x effective interest rate
Aka, yield rate & market rate

Question 3

What is the bond carrying amount?

Answer 3

The amount received for the bond adjusted for the amortization of the premium or discount. If the discount has been added you need to subtract it to get the carrying amount or add it back if it’s a premium.

Question 4

What are 2 types of debenture bonds?

Answer 4

Registered bonds and
Convertible bonds

Question 5

True or False.
In a sale without recourse the buyer assumes the risk of uncollectible accounts.

Answer 5

True

Question 6

True or False
When receivables are factored without recourse the transaction is treated as a sale. The buyer accepts full risk.

Answer 6

True

Question 7

True or false. The carrying amount of a bond is increased with a bond discount.

Answer 7

True

Question 8

True or false. The carrying amount of a bond is decreased with a bond premium.

Answer 8

True

Question 9

What is cash interest paid?

Answer 9

Face amount x stated rate

Question 10

What is a bond discount?

Answer 10

When the bonds stated rate is less than the market rate. So the cash proceeds are less than the face amount. The bonds are sold at a discount.

Question 11

What is a bond premium?

Answer 11

When the bonds stated rate is greater than the market rate. So the cash proceeds are greater than the face amount. The bonds are sold at a premium

Question 12

True or false. The difference between interest expense and cash interest paid is the discount of premium.

Answer 12

True

Question 13

Fun fact

Answer 13

If the problem asks for accrued interest, it’s the amount from after the last interest payment to the issue date of the bond.

Question 14

Fun fact

Answer 14

If the problem ask for the interest expense, it’s the interest amount from the issue date to the end of the period. (The problem will specify the period end date.)

Question 15

What creates a premium on bonds payable?

Answer 15

A premium on bonds payable arises when the amount received from the sale exceeds the face amount of the bonds.

Question 16

Fun fact TS

Answer 16

An entities TS transactions don not affect its net income. So no gains or losses are recognized.

Question 17

Formula for bonds payable

Answer 17

1. Multiply interest by PV of 1 at yield rate. (Get interest by multiplying face amount times stated rate)
2. Multiply face amount by PV of ordinary annuity at yield rate.
3. Subtract the answer in number 2 from face amount
4. Calculate cash interest and interest expense and add amount to last answer or subtract for premium. (Use #3 answer and yield rate to calculate Interest expense. Face amount and stated rate to calculate cash interest.)