FAR-Bonds and Fair Value

Question 1

What is a debenture bond?

Answer 1

Unsecured bonds that are not supported by any collateral.

Question 2

What is a serial bond?

Answer 2

A bond in which the principle matures in installments.

Question 3

What is a bond sinking fund?

Answer 3

A bond sinking fund is a restricted asset of a corporation that was required to set aside money for redeeming or buying back some of its bonds payable.

Question 4

What is a term bond?

Answer 4

Bonds that mature on a single date

Question 5

When a bond is issued with a discount, how does interest revenue/expense, amount of amortization, and the bond carry value behave?

Answer 5

Interest revenue/expense GOES UP
Amount of amortization GOES UP
Bond carry value GOES UP

Question 6

When a bond is issued with a premium, how does interest revenue/expense, amount of amortization, and the bond carry value behave?

Answer 6

Interest revenue/expense GOES DOWN
Amount of amortization GOES UP
Bond carry value GOES DOWN

Question 7

The value of a bond is equal to which of the follow? (Two things)

Answer 7

Maturity value and present value of interest payments.

Question 8

In what case does a bond not have a discount or premium AND the effective interest method is not used to measure interest expense?

Answer 8

When the fair value option is elected

Question 9

How does the interest rate behave for a bond that was issued at a premium that is amortized using the straight-line method?

Answer 9

It goes up each year as the interest expense stays the same, but the bond carrying value goes down.

Question 10

How does the interest rate behave for a bond that was issued at a discount that is amortized using the straight-line method?

Answer 10

It goes down each year as the interest expense stays the same, but the bond carrying value goes up.

Question 11

If the carrying value of a bond goes up (or down) when amortizing a bond with the effective interest method, in what direction does interest expense/revenue move?

Answer 11

Interest expense/revenue will move in the same direction as the carrying value when using the effective interest method. This is because the interest expense/revenue is found by multiplying the carrying amount by the effective interest rate.

So when the carrying value goes up, interest expense goes up, when carrying value goes down, interest expense goes down.

Question 12

When is a bond issued at a premium?

Answer 12

When the stated rate is higher than the effective rate. The premium occurs since more money is paid to obtain a high return than what is available in the market.

Question 13

When is a bond issued at a discount?

Answer 13

When the stated rate is lower than the effective rate. The discount occurs since the stated rate is lower than what is available in the market.

Question 14

How does amortization behave under both a premium and a discount under the effective interest method?

Answer 14

It goes up

Question 15

If a note is issue at unreasonable terms, what are the criteria to find the present value of the note?

Answer 15

(1) Fair value of the property, goods, or services exchanged
2) Fair value of the note
3) Imputed Interest Rate

Stice, Earl K.; Stice, James D. (2013-03-12). Intermediate Accounting (Page 7-35). Cengage Textbook. Kindle Edition.

Question 16

What items would make the terms of a note unreasonable?

Answer 16

No interest stated, the stated rate is too high or too low, or face amount is significantly different from sales price of services or goods involved in the exchange.

Question 17

How is interest income calculated on a instrument that has an imputed interest rate?

Answer 17

CV*Imputed Interest Rate

Question 18

How are the FV Factors found when only PV Factors are provided?

Answer 18

PV Factor + 1

Question 19

What is the alternative method to calculated the Factor when no factors are available?

Answer 19

Future Amount/Present Amount

Question 20

What is the alternative to method to calculate the Present Value amount?

Answer 20

Future Amount/Factor

Question 21

How are Notes with a maturity of less than a year present valued?

Answer 21

At their face. Notes that are issued through the normal course of business that are due in less than a year are recorded at their face value

Question 22

How many securities are issued with a convertible bond?

Answer 22

A convertible bond is one security. The convertibility feature is not valued.

Question 23

When amortizing a bond with the effective interest method, how is the interest paid calculated?

Answer 23

Face value*Coupon Rate

Question 24

When amortizing a bond with the effective interest method, how is the interest expense calculated?

Answer 24

Carrying value*Effective Rate

Question 25

When amortizing a bond with the effective interest method, how is the amortized premium/discount calculated?

Answer 25

The difference between the Interest Paid and Interest Expense.

Question 26

When amortizing a bond with the effective interest method, how is the unamortized amount calculated?

Answer 26

The difference between the Premium or Discount, and the Ammortized Premium/Discount

Question 27

What are included in bond issue costs?

Answer 27

Printing and engraving of the bond certificates
Legal and accounting fees
Underwriter commisions
Promotion Costs

Question 28

How are Bond Issue Costs treated? Are they expensed?

Answer 28

They are amortized

Question 29

What is the difference between the Book Value Method, and the Market Value Method?

Answer 29

Book Value Method: No gain or loss. Plug is APIC

Market Value Method: Has gain or loss.