Chapter 10:Bonds

Question 1

Bonds: General Characteristics

Answer 1

Issued by companies only when large amounts of -money is needed to be raised for acquisition of long term assets.

• The corporation receives the cash at the original issuance
• Principal is repaid at maturity date whereas interest is paid semiannually or yearly.
• They have a long life (10 – 30 years)
• Principal = Face = Maturity value = PAR

Question 2

Interest is typically paid

Answer 2

semi-annually–based on the annual interest rate STATED on the bond document.

Question 3

Stated Rate may be called

Answer 3

STATED = COUPON = FACE INTEREST = NOMINAL = CONTRACTURAL

Question 4

Interest expense on the Income Statement reflects the

Answer 4

market interest rate

Question 5

Market Interest Rate =

Answer 5

= Effective Interest Rate = Yield Rate

Question 6

Interest expense is

Answer 6

tax deductible

Question 7

Dividends declared

Answer 7

are NOT tax deductible for the issuer of stock.

Question 8

Interest revenue (bonds) and dividend revenue (stocks) are

Answer 8

included in taxable income of creditor/investor.

Question 9

If investor buys between interest date

Answer 9

then investor pays the market price of the bond plus interest accrued from last issuance date to date of purchase to the seller

Question 10

Interest Payment Formula

Answer 10

IP= P x Sr x T

Question 11

Premium

Answer 11

we ↑  NI by ↓ Interest Expense through the process of amortization

Question 12

Discount

Answer 12

we ↓NI by ↑ Interest Expense through the process of amortization

Question 13

Premium: Interest Expense

Discount : Interest Expense

Answer 13

Premium: Interest Expense = Cash Paid for Interest MINUS
the amortization of the premium

Discount : Interest Expense = Cash Paid for Interest PLUS
the amortization of the discount

Question 14

Interest Expense (IE) is based

Answer 14

on the MR (market rate) of interest

Question 15

Interest Paid (cash or interest payable)

Answer 15

is based on the SR (stated rate) of interest

Question 16

New Financing Activities

Answer 16

1. Issue Bonds (inflow of cash)

2. Repay principal at maturity date (outflow of cash).

Question 17

The increase and decrease statements about bonds

Answer 17

-By decreasing premium (through amortization) we will be adding a smaller and smaller number to the bonds payable (carrying value gets smaller).
-By decreasing discount account, we will be subtracting a
smaller and smaller number to bonds payable so carrying value gets larger and larger

Question 18

Proceeds

Answer 18

= issuance price = market price on issue date

Question 19

Face =

Answer 19

maturity value = principal

Question 20

Carrying value=

Answer 20

book value, net liability.

Question 21

Stated rate=

Answer 21

coupon rate, nominal rate, face interest rate, contractual rate

Question 22

Market rate=

Answer 22

yield rate, effective rate

Question 23

Cash paid is based on

Answer 23

stated rate at time of issuance: IP = P x SR x T.

Question 24

Interest expense on I/S

Answer 24

approximates the market rate of interest at time of issuance.

Question 25

Two things that are the same on chart

Answer 25

• bonds payable recorded at

- cash paid

Question 26

Proceeds vs Value (Chart)

Answer 26

see handout

Question 27

Bonds payable at recorded at (chart)

Answer 27

see h….

Question 28

carrying value (chart)

Answer 28

see h….

Question 29

changes to book value(chart)

Answer 29

see h….

Question 30

SR vs MR(chart)

Answer 30

see h….

Question 31

Interest Expense(chart)

Answer 31

see h…

Question 32

Cash Paid(chart)

Answer 32

see h…….

Question 33

Ch.10 question 16

Answer 33

Payroll deductions are recorded as liabilities. Gross earnings are recorded as salaries and wages expenses. Net pay is recorded as salaries and wages payable.