FAR 11 - BONDS Flashcards
Will Bond Proceeds at issuance equal the face value?
No.
Bond Proceeds at issuance will equal the sum of the present value of the face value + any annual interest payments
How do you calculate interest on a bonds payable in the first year?
multiply the carrying value (in the first year, carrying value is simply the proceeds) by the market rate (aka effective rate, aka yield)
how do you do you calculate the carrying value of a bond?
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
For purposes of Bond Retirement, how do you calculate the amount that should be used to determine a gain or loss on redemption?
face value + unamortized bond premium - unamortized bond issue costs
What are Debenture bonds
Debenture = unsecured
Bonds were issued at 99 plus accrued interest. How do you calculate the amount received for this issuance?
Proceeds = 99% of the face value + interest accruing from the last interest payment
how do you calculate accrued interest in a bond issuance?
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
what is included in Bond issue costs?
Bond issue costs = promotion costs, engraving and printing, underwriters commissions
all costs a company incurs in order to be able to issue bonds
another word for issue price is ____
proceeds
issue price/proceeds =
present value of the face value + present value of stated interest
the carrying amount of bonds would be ________ in earlier periods under straight-line method of amortizing a discount vs effective interest method.
overstated
how do you calculate total interest expense over the term of a bond?
cash interest paid - premium
amortization of bond discounts increases or decreases the carrying amount?
increases the carrying amount
bond discounts reduce or increase the carrying amount of bonds?
reduce the carrying amount of bonds
what is the journal entry for when debt is issued at a discount?
debit cash
debit discount
credit bonds payable
what is the journal entry for when interest is paid on a discounted bond?
debit interest expense
credit discount
credit cash
What does bond subordination mean?
it is a class of bond that, in the event o liquidation, is prioritized lower than other classes of bonds.
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
- smaller charges
2. larger charges
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
- lower amounts
2. higher amounts
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).
- higher amortization
- overstated
*when interest is overstated, retained earnings would be understated
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.
- Overstated
Set up a bond amort schedule:
- # of periods
- cash payments
- interest expense
- amort exp
- unamortized balance
- carrying value
- given
- face value X stated rate
- carrying value X market rate
- column 2 - column 3
- prior unamortized balance - absolute value of column 4
- prior carrying value minus column 4
How do you calculate the amount to be reported as a noncurrent investment in a bond sinking fund?
1. beg bal \+ 2. additional investment \+ 3. earnings - 4. admin costs