FAR 11 - BONDS & PRESENT VALUE TABLES Flashcards
Bond J/E at Issuance
(w/ BIC & Accrued Interes)
DR: Cash ([Effective Interest % x Face] + Accrued Int - BIC)
DR: BIC
DR: Discount (Plug)
CR: Bond Payable @ Face Amount
CR: Accrued Int Payable
CR: Premium (Plug)
Note: CV of Bond = Bond Payable +/- Premium or Discount
Bond Terms
Record
vs
Report
Record = Bond Payable Amount
vs.
Report = Bond Carrying Value Amount
Discount Amortization
DR: Interest Expense (CV * Effective Int Rate)
CR: Discount (Plug)
CR: Cash (Face * Stated Rate)
NOTE: When amortizing a discount, interest increases each year & amortization of discount increases each year. WHy? Because the CV of the bond is increasing.
Premium Amortization
DR: Interest Expense (CV * Effective Int Rate)
DR: Premium (plug)
CR: Cash (Face * Stated Rate)
NOTE: When amortizing a premium, the interest expense decreases each year, but the amortization of the premium increases. WHy? Because the CV of the bond is decreasing.
What are the two ways of Converting Bonds?
- Book Value Method
- Market Value Method
NOTE: If Bond is converted then it becomes a Stock, so only 1 security & no value is given to the convertability featurs.
NOTE: When a bond is converted to a stock, regardless of which method, stockholder’s equity will increase & LT liabilities will decrease.
Convertable Bonds
Book Value Method (GAAP)
Book Value Method = NO GAINS/LOSS
DR: Bonds Payable
DR: Premium
CR: BIC
CR: Common Stock (par)
CR: APIC (plug)
Convertible Bonds
Market Value Method (non-GAAP)
Market Value Method - Gain/Loss are not extraordinary
DR: Bonds Payable (face)
DR: Premium
DR: Loss (plug)
CR: BIC
CR: Common Stock (par)
CR: APIC (@ Market Value)
CR: Gain (plug)
Bonds w/ Detachable Stock Purchase Warrants
Valued as two securities using the relative FMV approach
If FMV of only one security is known, the other is a plug
NOTE: Calculate how much the warrant is first then calculate the bond.
DR: Cash
DR: Discount
CR: Bond Payable
CR: APIC - Warrants
How are bonds recorded under IFRS?
Two Methods
Amortized cost
Fair Value through P & L
What is the Present Value Formula?
PV = Future Amount x Factor
Future Amount = Face of the Bond
Factor = PV percentage
The market value of a bond consists of two parts?
The PV of cash flows from interest, calculated at the stated rate, and the PV of the principal.
These two amounts are added together to get the market price or selling price of the bond.
Term Bonds
Vs.
Serial Bonds
Vs.
Debenture Bonds
Term Bonds - a bond that will pay the entire principal upon maturity at the end of the term
Serial Bonds - a bond in which the principal matures in installments
Debenture Bonds - Unsecured bonds that are not supported by any collateral
Interest Expense
vs.
Interest Payable
(How is accrued interest payable calculated?)
Bond Interest Expense is based on:
- Face x Effective Rate x Time
Bond interest expense is always reported on the basis of the amount of time the bonds were outstanding during the year, regardless of when or how frequently interest is paid. Since these bonds were issued on 6/1/X1, by 12/31/X1 they had been outstanding for 7 months.
Bond Interest Payable is based on:
- Face x Stated Rate x Time
Interest payable is the amount that the company will have to pay in cash as a result of the time elapsed since the previous interest payment. The amount will be equal to the face of the bond multiplied by the stated rate times the portion of a year since the most recent interest payment. Since interest was paid on 6/30/X2, interest payable will be for the 3-month period from 6/30 to 9/30. Interest payable = $300,000 x 12% x 3/12 = $9,000.
Convertable Bonds
vs.
Non-convertable Bonds
Non-convertable bonds has a higher interest rate because it doesnt have the convertable feature.
Present Value of Proceeds
2 Items to PV
-
PV of the Face
- (Face x PV of lump sum Effective int)
-
PV of the Interest
- Face x Stated Rate) x PV of annuity at effective int
