Bonds Payable Flashcards

1
Q

On March 1, 2005, Clark Co. issued bonds at a discount. Clark incorrectly used the straight-line method instead of the effective interest method to amortize the discount. How were the following amounts, as of December 31, 2005, affected by the error?
Bond carrying amount Retained earnings
Overstated Overstated
Understated Understated
Overstated Understated
Understated Overstated

A

The SL method recognizes the average amount of discount amortization every period, which must be larger than under the effective interest method early in the bond term. Thus, interest expense under the SL method results in higher interest expense, lower retained earnings, and higher bond carrying value because more discount is amortized early in the bond term than under the effective interest method.

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2
Q

what is the current portion called

A

current maturities of long term debt

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3
Q

7 items of information

A
face (maturity) value
stated interest rate
interest payment dates
market (yield, effective) interest rate
bond date
issuance date
maturity date
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4
Q

what bond matures serially

A

serial

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5
Q

what bond matures at once

A

term or single maturity

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6
Q

a premium results because

A

stated rate > market rate

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7
Q

a discount results because

A

market rate > stated rate

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8
Q

entry to record issuance of bond

A

cash
discount
bond payable (face value)

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9
Q

2 methods of amorization

A

effective interest

SL method

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10
Q

effective interest method

A

interest exp(yieldxissue price)
discount on bonds payable (plug)
cash(stated ratexface)

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11
Q

SL method

A

interest expense (plus)
discount (original discount/months)
cash (stated ratexface)

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12
Q

purpose of amortization of premiums and discounts

A

to adjust interest expense to reflect the market rate of interest and to ensure that the book value at maturity equals face value

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13
Q

premium amorization entry

A

interest exp
premium
cash

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14
Q

discount amorization entry

A

interest exp
discount
cash

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15
Q

is a value assigned to the conversion feature when convertible debt is issued

A

No value is assigned to the conversion feature when convertible debt is issued

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16
Q

is a convertible debt securities interest rate lower than nonconvertible debt.

A

Investors of convertible debt receive the security of debt (guaranteed principal and interest) plus the option of converting to stock if the value of the stock has appreciated. This conversion feature entices investors to accept a lower interest rate than would be given with a non-convertible debt issue.

17
Q

When bonds are converted to stock and accounted for by the book value method what happens to owners equity

A

the owners’ equity is increased by the book value of the bonds.

18
Q

are the entire proceeds treated as selling price of bond

A

yes

19
Q

2 methods for conversion

A

book value and market value

20
Q

entry for bookvalue method

A

bonds payable
discount
common stock
contribution capital in excess of par

21
Q

entry for market value method

A
bond payable
loss on conversion of bond
  discount
  common stock
  contribution capital in excess of par
22
Q

entry for induced conversion

A
bond payable
expense for bond conversion
  discount
  common stock
  contribution capital in excess of par