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acct 262 > Chapter 14- Bonds > Flashcards

Chapter 14- Bonds Flashcards

1
Q

what is a bond

A

written promise to pay par value and interest

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2
Q

par value

A

(face value)- amount paid at maturity

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3
Q

interest

A 
annual simple 
contract rate
nominal rate
coupon rate
-paid semiannually, annually, or quarterly. 
I=PRT
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4
Q

advantages of bonds

A
  • doesnt effect share holders equity
  • increase return on equity
  • interest is tax deductible
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5
Q

disadvantages of bonds

A
  • require payment of interest and par value at maturity

- decrease return on equity

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6
Q

types of bonds

A 
secured
unsecured
term
serial
registered
bearer
convertible 
callable 
redeemable
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7
Q

issuing bonds

A
  • sold to underwriter who sells to public/ investors

- must be approved by board of directors and shareholers

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8
Q

bond indenture

A

legal document that identifies rights and obligations of bond and bondholders

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9
Q

Pricing of bonds

A

fair value uses market value effective interest rate
-the issue price of a bond is equal to the present value of the bonds future cash payments calculated using market interest rates

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10
Q

Market price of a bond

A

Equal to (at par)
less than
or more of face value

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11
Q

above market rate bond sells at?

A

premium which is greater than 100 % if face value

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12
Q

Equal to market price, bond sells at?

A

at par 100% of face value

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13
Q

below market rate, bond sells at?

A

a discount less than 100% of face value

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14
Q

at par issuance share entry

A

dr cash

cr bond payable

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15
Q

interest payment journal entry

A

dr bond interest expense

cr cash

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16
Q

Journal entry of maturity date of bond

A

dr bonds payable

cr cash

17
Q

issuing bonds between interest dates

A

-bonds sold at a date other than interest payment date, the purchaser pays the purchase price and the interest.– the issuing company repays back the interest on the next interest date.

18
Q

Journal entry for issuing bonds between interest dates

A

Dr cash
cr bonds payable
cr interest payable

Interest date

Dr interest payable
dr bond interest expense
cr cash

19
Q

issuing bond at a discount, what does it mean?

A
  • below market rate, so the contract rate is below market rate- you pay lower interest payments that what the market says therefore you give the purchaser a discount
  • Market rate> contract rate
  • purchaser pays less than face value
20
Q

How to determine issue price if market rate is greater than contract rate (discount) with table

A

issue price= pv of principle x pv interest payments
cashflow\table\table value\ amount\ pv
par value
interest payments
- first interest payment = par value x contract rate x fraction of year then multiply that by number of payments

21
Q

how to determine issue price using financial calculator

A
  1. determine interest payment use face value x contract rate x fraction of year
    then use the interest payment in an annuity and use calculator to solve for present value
  2. using calculator
    fv= face value n=number of payments
    i/y= market rate p/y= number of pmts per year
    pmt= amount you already calculated
    compute pv
22
Q

balance sheet presentation of bond at discount

A

non-current liabilities
bonds payable, 8% due dec 31 2024
less: discount on bonds payable

The book value is the CARRYING VALUE

23
Q

effective interest method

A

-allocates discount and interest over life of bond.
discount expensed over each period
*uses market rate on issue date
1. calculate periodic interest amount using contract rate, this is the cash paid to the purchaser and its face value x contract rate x time period
2. periodic interest expense = carrying value x market rate x fraction of year

24
Q

periodic interest expense vs cash amount paid to interest rate

A

periodic interest expense > cash amount paid

this is because you credit discount on bonds payable, the discount is paid when you pay the face value therefore you only pay the purchaser the regular amount of interest you just allocate the discount as an expense with the interest

25
Q

amortization table

A

period ending/ cash interest payment/ period interest expense/ discount amortized/ unamortized discount/ carrying value

26
Q

Entry for issuing bond at discount

A

dr cash
dr discount on bond payable
cr bonds payable

27
Q

entry for interest expense (discount)

A

dr bond interest expense
cr `discount on bond payable
cr cash

28
Q

Year end interest accrual (discount)

A

dr bond interest expense
cr discount on bonds payable
cr interest payable

29
Q

Year end interest accrual payment (discount)

A

Dr interest payable
dr bond interest expense
cr discount on bonds payable
cr cash

acct 262 (8 decks)

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