Bonds Payable Flashcards
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
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.
what is the current portion called
current maturities of long term debt
7 items of information
face (maturity) value stated interest rate interest payment dates market (yield, effective) interest rate bond date issuance date maturity date
what bond matures serially
serial
what bond matures at once
term or single maturity
a premium results because
stated rate > market rate
a discount results because
market rate > stated rate
entry to record issuance of bond
cash
discount
bond payable (face value)
2 methods of amorization
effective interest
SL method
effective interest method
interest exp(yieldxissue price)
discount on bonds payable (plug)
cash(stated ratexface)
SL method
interest expense (plus)
discount (original discount/months)
cash (stated ratexface)
purpose of amortization of premiums and discounts
to adjust interest expense to reflect the market rate of interest and to ensure that the book value at maturity equals face value
premium amorization entry
interest exp
premium
cash
discount amorization entry
interest exp
discount
cash
is a value assigned to the conversion feature when convertible debt is issued
No value is assigned to the conversion feature when convertible debt is issued