FAR 5 - Long-Term Liabilities and Bonds Payable Flashcards
What is interest payable for straight-line amortization? Balance Sheet
Interest payable is Bond Face x Coupon Rate
Interest payable is calculated from the date interest was owned since last pay date.
What is interest expense for straight-line amortization? Income Statement
Bond Face x Coupon +(-) amortization = Interest expense
Interest expense is calculated from the date of issuance.
How do you calculate straight line amortization?
Premium/discount and bond issuance cost / number of periods bond is outstanding.
How do you calculate straight line amortization for bond discount?
Straight line amortization (Discount / number of periods) + (Face x Coupon) = Amount paid.
Amount paid gets added to net carrying value.
What are bond journal entries for borrower under straight line amortization for bond discount?
1/1/X1
Dr: Cash
Dr: Discount on bond payable
Cr: Bond payable
6/30/X1
Dr: Bond interest expense
Cr: Discount on bond payable
Cr: Cash
What are bond journal entries for investor under straight line amortization for bond discount?
1/1/X1
Dr: Investment in bonds
Cr: Cash
6/30/X1
Dr: Cash
Dr: Investment in bonds
Cr: Bond interest revenue
How do you calculate straight line amortization for bond premium?
Straight line amortization (Premium/ number of periods) - (Face x Coupon) = Amount paid.
Amount paid gets subtracted to net carrying value.
What are bond journal entries for borrower under straight line amortization for bond premium?
1/1/X1
Dr: Cash
Cr: Premium on bond payable
Cr: Bond payable
6/30/X1
Dr: Bond interest expense
Dr: Premium on bond payable
Cr: Cash
What are bond journal entries for investor under straight line amortization for bond premium?
1/1/X1
Dr: Investment in bonds
Cr: Cash
6/30/X1
Dr: Cash
Cr: Investment in bonds
Cr: Bond interest revenue
Is straight-line amortization GAAP? Is Effective interest method GAAP? What is the purpose of using effective interest method?
The effective interest method is GAAP.
The effective interest method amortizes bonds/premiums.
What is the interest expense in income statement for effective interest method?
Net carrying value x effective interest rate = interest expense
What is the interest payable in balance sheet for effective interest method?
Bond face x coupon rate = interest paid
What is the difference between income statement (interest expense) and balance sheet (interest payable)?
Amortization
How do you calculate amortization for bond premium/discount effective interest method?
1) Beg period net carrying value x amortization rate = interest expense
2) Face x coupon rate = interest payable
Interest expense - interest payable = amortization
What are the journal entries for borrower under bond premium for effective interest method?
1/1/X1
Dr: Cash
Cr: Premium on bonds payable
Cr: Bond payable
6/30/X1
Dr: Bond Interest expense (NCV x effective rate)
Dr: Premium on bonds payable (the amortization amount)
Cr: Cash (the interest payable - face x coupon)
12/30/X1
Dr: Bond interest expense
Dr: Premium on bonds payable
Cr: Cash
What are the journal entries for investor under bond premium for effective interest method?
1/1/x1
Dr: Investment in bonds
Cr: Cash
6/30/X1
Dr: Cash (the face x coupon amount you are receiving)
Cr: Investment in bonds (amortization amount)
Cr: Bond interest revenue (NCV x effective rate)
What are the journal entries for borrower under bond discount for effective interest method?
1/1/x1
Dr: Cash
Dr: Discount on bonds payable
Cr: Bond payable
6/30/X1
Dr: Bond interest expense (NCV x effective rate)
Cr: Discount on bonds payable (amortization)
Cr: Cash (the face x coupon)
12/30/X1
Dr: Bond interest expense
Cr: Discount on bonds payable
Cr: Cash
What are the journal entries for investor under bond discount for effective interest method?
1/1/X1
Dr: Investment in bonds
Cr: Cash
6/30/X1
Dr: Cash (face x coupon)
Dr: Investment in bonds (amortization)
Cr: Bond interest revenue (NCV x effective rate)
12/30/X1
Dr: Cash
Dr: Investment in bonds
Cr: Bond interest revenue
What do you do if there are bond issuance costs in effective interest method?
If there are bond issuance costs, reduce cash by bond issuance amount.
Then, add the bond issuance costs to discount and call it (Discount and bond issuance costs).
Do you add or subtract amortization to carrying value?
If you have premium, amortization is going towards to face SUBTRACT towards face.
If you have discount, amortization is going towards to face ADD towards face.
Define Interest Payable?
Define Interest expense
Face value of bonds x contractual interest rate = Interest Payable
CV of bonds x effective interest rate = Interest Expense
