Bonds Flashcards
what are bond issue cost and how are they accounted
When bonds are issued, the issuing company often incurs printing costs, legal fees, commissions, and other similar expenses. Per ASC 835-30-45-3, bond issue costs are debited to a deferred charge account and amortized similarly to the bond discount.
Under IFRS, how are convertible bonds issued
Convertible bonds are separated into debt and equity components with the liability component recorded at fair value and the residual assigned to the equity component. The fair value election may be made for the financial liability component.
How to determine the selling price of a bond
The selling price of a bond is equal to the pv of future cash flows related to the bond financial instruments ( principal and cash interest).
If the stated rate is greater thank the market rate of interest, the bond will sell at a premium.
Mid the states interest rate is less than the market rate of interest, the bond will sell at a discount.
What is the effective interest method of determine the selling price of a bond
This method first computed interest expense based on the begin book value of the bond and the market rate at issuance. The diff. Between int exp and the cash interest paid is the amortization of the discount or the premium. The market rate at issuance is always used.
What is the straight line method of determining bond selling price?
This method recognizes a constant amount of amortization each month of the bond term. The straight line should not be used when (a) the bond term to market and the stated rates or (b) when there is a very significant difference between the market and stated rates regardless of the length of term.
What is a sinking fund and how does it operate.
Businesses occasionally accumulate a fund of cash and/or investments for a specific purpose, such as the retirement of bonds in this problem. These funds are referred to as “sinking funds.” The sinking fund is increased when periodic additions are made to the fund and when revenue is earned on the investments held in the fund. When cash is used to purchase investments, the components of the fund change (i.e., cash is invested and replaced by bonds or other securities), but the total fund balance is not affected.
