Bonds & PV Tables Flashcards
When are bonds issued at discount rate?
Bonds are typically issued at discount rate when the rate stated is lesser than the effective interest rate to yield the current rate.
What is the effective interest method used for?
It is used to amortize the discount. By doing so the discount amortization is added to the carrying value each period so the bond’s fave vale equals current value at maturity.
What are bond sinking funds?
Bond sinking funds are bonds issued with a requirement for the issuer to establish a saving fund(i.e sinking fund) which would used to retire or in other terms repay the loan. This is reported on the company’s balance sheet as a noncurrent asset.
What is a future value?
Future values project cash at a future date. The FV factor for an annuity can be used to calculate the amount if recurring payment needed to accumulate a desired FV.
What do investors use FV factor for?
Investors use it for an annuity to determine how much a series of recurring payments will be worth in the future. Typically payments made at the beginning of a period use the annuity due factor.
What is the treatment of bonds when issued at PAR?
When bonds are issued at par the carrying value equals the face value and the effective rate equals the stated rate.
What is the effective interest method formula?
Interest expense = Bond carrying value * Effective interest rate * time period
How is bonds issued at a premium (net of bond issue costs) journaled?
Debit cash, net of bond issue costs then credit premium, net of bond issue costs and bonds payable
How is bonds issued at a premium (net of bond issue costs) journaled?
Debit cash, net of bond issue costs then credit premium, net of bond issue costs and bonds payable
What happens when a bond’s interest expense is overstated using the straight-line method instead of effective interest method?
GAAP requires using the effective interest method to always amortize a bond’s discount so that the interest expense will correlate to the bond’s CV. An overstated interest expense will result in understated retained earnings.
