FAR 11 - BONDS

Question 1

Will Bond Proceeds at issuance equal the face value?

Answer 1

No.

Bond Proceeds at issuance will equal the sum of the present value of the face value + any annual interest payments

Question 2

How do you calculate interest on a bonds payable in the first year?

Answer 2

multiply the carrying value (in the first year, carrying value is simply the proceeds) by the market rate (aka effective rate, aka yield)

Question 3

how do you do you calculate the carrying value of a bond?

Answer 3

3 column: cash payment (face value X stated rate)

create an amortization table

1 column: proceeds
X effective rate =

2 column: interest
minus

4 column: amort

5 column: proceeds plus amort= cv

Question 4

For purposes of Bond Retirement, how do you calculate the amount that should be used to determine a gain or loss on redemption?

Answer 4

face value + unamortized bond premium - unamortized bond issue costs

Question 5

What are Debenture bonds

Answer 5

Debenture = unsecured

Question 6

Bonds were issued at 99 plus accrued interest. How do you calculate the amount received for this issuance?

Answer 6

Proceeds = 99% of the face value + interest accruing from the last interest payment

Question 7

how do you calculate accrued interest in a bond issuance?

Answer 7

prorate the amount of time that has passed from the last interest payment date up to the issuance and then multiply this by the annual interest

**i.e.
last interest payment: 4/1/X4

Bonds issued: 7/1/X4

3 months have gone by

accrued interest= face value X stated rate X 3/12

Question 8

what is included in Bond issue costs?

Answer 8

Bond issue costs = promotion costs, engraving and printing, underwriters commissions

all costs a company incurs in order to be able to issue bonds

Question 9

another word for issue price is ____

Answer 9

proceeds

Question 10

issue price/proceeds =

Answer 10

present value of the face value + present value of stated interest

Question 11

the carrying amount of bonds would be ________ in earlier periods under straight-line method of amortizing a discount vs effective interest method.

Answer 11

overstated

Question 12

how do you calculate total interest expense over the term of a bond?

Answer 12

cash interest paid - premium

Question 13

amortization of bond discounts increases or decreases the carrying amount?

Answer 13

increases the carrying amount

Question 14

bond discounts reduce or increase the carrying amount of bonds?

Answer 14

reduce the carrying amount of bonds

Question 15

what is the journal entry for when debt is issued at a discount?

Answer 15

debit cash
debit discount
credit bonds payable

Question 16

what is the journal entry for when interest is paid on a discounted bond?

Answer 16

debit interest expense
credit discount
credit cash

Question 17

What does bond subordination mean?

Answer 17

it is a class of bond that, in the event o liquidation, is prioritized lower than other classes of bonds.

Question 18

The effective interest method of amortization, when applied to a bond discount, will result in 1. (smaller/larger) charges to interest expense in the early periods and 2.(smaller/larger) charges in the later periods

Answer 18

1. smaller charges

2. larger charges

Question 19

The effective interest method of amortization, when applied to a bond discount, will result in 1. (lower/higher) amounts of amortization in the early periods and 2.(lower/higher) amounts in the later periods

Answer 19

1. lower amounts

2. higher amounts

Question 20

Amortization of bond discount under the straight-line method would result in 1.(higher/lower) amortization in the early periods, causing interest expense and carrying value to be 2.(overstated/understated).

Answer 20

1. higher amortization
2. overstated

*when interest is overstated, retained earnings would be understated

Question 21

The effective interest method of amortization, when applied to a bond discount, will result in 1.(overstated/understated) bond carrying value compared to the straight-line method.

Answer 21

1. Overstated

Question 22

Set up a bond amort schedule:

Answer 22

1. # of periods
2. cash payments
3. interest expense
4. amort exp
5. unamortized balance
6. carrying value
7. given
8. face value X stated rate
9. carrying value X market rate
10. column 2 - column 3
11. prior unamortized balance - absolute value of column 4
12. prior carrying value minus column 4

Question 23

How do you calculate the amount to be reported as a noncurrent investment in a bond sinking fund?

Answer 23

1. beg bal
\+
2. additional investment
\+
3. earnings
-
4. admin costs