Class notes--Chapter 10A_Accounting for bonds payable Flashcards
What is bonds payable
promise to repay a specified amount at a fixed future date, form of interest bearing note payable
why are bonds used
large amounts are dividend into smaller denominations
when are bonds payable
at maturity (term bonds)
or
at installment (Serial bonds)
where are bonds traded
publically on exchanges
what is coupon interest rate
rate determining the amount paid to investors
->specified on the bond, and it determines cash payments
what is market/effective interest rate/yield
rate investors demand for loaning funds at any given point in time
what are the two different interest rates
coupon rates
market rates
what value are bonds issued at (3)
1) at face value
2) below face value (Discont)
3) above face value (premium)
if market rate== coupon rate, bond is issues at what rate?
at par, or at face value
if market rate> coupon rate, bond is issues at what rate?
below face value/discount
if market rate<coupon rate, bond is issues at what rate?
above face value/premium
what is future value
the value paid at the end of the bond maturity
in a bond time line, what is the value paid at the end called
what is the value paid yearly called
waht is the time zero called
what is the time at the end called
face value/future value
coupon rate/annual interest payment (face value* coupon rate)
issue date
maturity date
slide 42
what is the present value
price at which the bond is issued
should you record present value as negative or positive
positive! ignore the signs
the numbers on the powerpoint slides 42-45 for present value are incorrect
double check it online
JE for face value bond issues
-discount
-premium
dr cash
cr bonds payable
only thing that changes is the number
slide 47
how is bond premium or discount ammortized
premiums and discounts amortized using effective interest method
1) calculate bond interest expense
=> carrying amt of bonds at beginning of period * market interest rate
2) calculate bond interest paid
=> face amount of bonds * coupon interest rate
3) calculate amortization amount
FORMULA
(carrying amt of bonds at beginning of period * market interest rate)- ( face amount of bonds * coupon interest rate)= amortizaiton amount
if a bond is issued at face value, then
bond interest expense and bond interest paid are equal
JE for bond interest payment face value
dr interest expense
cr cash
JE for bond interest payment discount
dr interest expense
dr bonds payable
cr cash
JE for bond interest payment premium
dr interest expense
dr bonds payable
cr cash
for discounted bonds, what is the carrying amount
face value of bonds= unamortized discount
discount balance increases until the bond reaches maturity
as you amortize a bond over its life, by the end discount or premium is amortized to>
zero
at maturity, carrying amount=face value
what is the carrying amount for premium bonds
carrying amount is face value of bond plus the unamortized premium
premium balance decreases until the bond reaches maturity value
can bond be retured at maturity
yes, this is when bonds carrying amount is=to their face value (discount or premium is zero bc of amortization)
can bond be retired earlier
yes, by purchasing on the open market
JE for rpaying bonds at maturity
Dr bonds paybale
cr cash
pressent value is always — than future value
less than
what is the difference between present value and future value
interest
interest earned in one period on the interest earned in precious years is compound interest
word
concept of growing vlaue illustrates==
the time value of money
carrying value is always equal to
present value
