Bonds

Question 1

What is the 5 step approach using the effective interest method?

Answer 1

Step 1) Determining the beginning carrying value of the bond
Step 2) Calculate the periodic interest expense
Step 3) Calculate the periodic interest payment
Step 4) calculate the periodic amortization expense for the premium/discount
Step 5) calculate the ending carrying value of the bond

Question 2

How do you calculate step 1 of the effective interest method? (usually given but sometimes need to calculate)

Answer 2

PV of future periodic payments (PV of $1)
x PV of future periodic interest payments (either annuity due or ordinary annuity)
_______________________________
Beginning Carrying Value

for the % use the MARKET rate not stated rate to calculate

Question 3

How do you calculate step 2 of the effective interest method?

Answer 3

Bonds beginning carrying value
x market rate
__________________________________
Interest Expense

Question 4

How do you calculate step 3 of the effective interest method?

Answer 4

Bonds face value
x stated rate
__________________________________
Interest payment

this is the amount actually paid

Question 5

How do you calculate step 4 of the effective interest method?

Answer 5

Interest Expense
- Interest Payment
_____________________
amortization expense

Question 6

How do you calculate step 5 of the effective interest method?

Answer 6

Beginning CV
+/- amortization expense
__________________________
ending cv

if a premium you subtract
if a discount you add

end goal is to get to face value of bond

Question 7

If the market rate > stated rate then its a:

Answer 7

Discount

Question 8

If the market rate is < stated rate then its a:

Answer 8

Premium

Question 9

present value factors are based on the

Answer 9

market rate

Question 10

bond issuance costs are

Answer 10

deducted from the carrying value of the bond

Question 11

4 step approach to accrued interest on bonds payable

Answer 11

step 1) determine CV
step 2) determine int payment before accrued interest
step 3) determine percentage of first interest payment in which the bond was not outstanding
step 4) add the accrued interest to the CV