Bonds Flashcards
How would you calculate a gain or loss on a Bond at Redemption?
You would take the Face amount plus any Bond premium minus the Bond issue costs
WHAT is the interest expense over the term of bond debt equal to when Debt is issued at a Discount?
THE cash interest paid plus the “discount”
The Journal Entry initially would be:
Debit Cash and Bond Discount
Credit Bonds Payable
During the amortization over the life of the Bond the Journal entry would be:
Debit Interest Expense
Credit Bond Discount and Cash
WHAT is a “substance defeasance?”
WHEN you place a Bond Face Amount of Money “in trust” to satisfy the remaining bond obligation with only a remote possibility that the liability will be greater
i.e. WHEN this occurs, the Bond is treated like a retirement of debt.
You would compare the Amount Paid to the Carrying value to identify a gain or loss
HOW would you calculate the Net Present Value of a Bond Investment?
By taking the Initial Cash Outlay and Subtracting it from the Present value of the Future Cash Inflows
WHAT are the “Carrying value” and the “Effective rate” when a Bond is issued at Par?
THE carrying value is the “face value” and the effective rate is the “stated rate”
HOW would you calculate the Bond Interest Payable under the Terms “99 plus accrued interest?”
You would multiply the proceeds from the issuance of the bond by 99%; and
- add that to the proceeds from the bond issuance times
- the elapsed time from the “Dated” period of when the interest is to be collected (e.g. Dated 4/1 but Issued 7/1 - You would calculate the interest for 3 periods as 3/12)
WHAT happens when the stated rate is less than the effective rate of interest?
THE interest expense is greater than the cash payment made to bondholders
i.e. The discount is amortized over the life of the bond and the amortization is added to the amount paid to determine interest expense
Fill in the Blank.
When investments are purchased, the amount in the sinking fund remains __A___.
A. Unchanged
NOTE: ONLY the composition of the fund has changed. As revenues are earned on the investments, the earnings are reported as income and added to the sinking fund
HOW does the Effective Interest Rate Method work when Factoring Amortization?
YOU have to:
(1) Identify the expired time of the year
(2) Then calculate your Interest expense using the Face plus premium amount; (this is based on the expired time for the Bond)
(3) You would do Steps (1) and (2) except using the Bond Face Amount and the Issued Percentage
WHAT happens to the carrying value of the Bond when issued at a “Discount?”
IT increases as the discount is amortized
i.e. The carrying value of a bond at the end of the period will be equal to its (1) carrying value at the beginning of the period plus (2) any discount amortization for the period
WHAT is the difference between a Term Bond and a Serial Bond?
Term Bonds face amount is repaid in a lump sum at the end of the bond term
Serial Bond is repaid in a series of periodic payments, which may or may not be equal in amount or interval
HOW would you calculate a bonds’ carrying amount at year end when an entity uses the effective interest method to amortize bond discounts?
TAKE the “carrying value” or “carrying amount” and add the discount amortization
WHAT is a trigger to know if a bond was issued at a “Discount” or “Premium”?
The Phrase “A company issues a bond at ……..”
- If the percentage is less that 100 percent then this is a Discount
- If the percentage is more than 100 percent then this is a Premium
HOW does Amortization Premium affect the Income Statement and Balance Sheet?
When a Bond is issued at a premium, Premium Amortization should be recorded.
If not recorded, Interest Expense is not properly reduced and is overstated.
Net Income is then Understated. Because Net Income rolls into Stockholders’ Equity, the Balance Sheet is also affected (i.e. Retained Earnings are understated)
WHAT are phrases used for “Term” and “Serial” Bonds?
Term = “registered debentures” or “Callable”
Versus
Serial = “subordinated debentures” that “mature annually”
