Long-term Liabilities and Bonds Payable Flashcards
The market interest rate is cause my a ______ or _______
premium; discount
Nondetachable warrants
a convertible bond must be converted into capital stock
Detachable warrants
Bond is not surrendered upon conversion, only the warrants plus cash representing the exercise price of the warrant. The warrants can be bought and sold separately from the bonds
Bonds that have a single fixed maturity date. The entire principal is paid at the end of this term/period
term bonds
pre-numbered bonds that the issuer may call and redeem a portion by serial number
serial bonds
Bonds are usually in denominations of _______
$1000
Price is always quoted in _______ for bonds
100’s
________ is a contract for purchase of bond
Indenture
Equal to the stated interest rate on the bond
coupon rate
Check amount (bond interest) =
coupon rate x face
Principal payoff is always the full ______ amount
face
__________ is the result of buyer and seller “adjusting” the coupon rate to the prevailing market rate of interest
premium/discount
A bond is issued at ___ _____ when the stated rate on the bond is equal to the market interest rate on the date the bonds are issued
par value
Interest is calculated using the present value of an ______
annuity of $1
The principal is calculated using the:
present value of $1
2 components that make up the fair value of a bond
PV of future interest payments (at market rate)
PV of principal (at market rate)
When the market rate is higher than the coupon rate, a ________ exists
discount
JE for an issued bond at a discount (borrower)
DR: cash
DR: discount on bond payable
CR: bond payable
JE for an issued bond at a discount (investor)
DR: investment in bonds
CR: Cash
When the market rate is lower than the coupon rate, a _______ exists
premium
JE for an issued bond at a premium (borrower)
DR: cash
CR: premium on bonds payable
CR: bonds payable
JE for an issued bond a premium (investor)
DR: investment in bonds
CR: cash
Stated interest rate =
coupon rate
effective interest rate =
market rate
An unamortized discount is ______ from the face (par) value of the bond to arrive at the carrying value at any particular point in time
subtracted
An unamortized premium is _____ to the face (par) value of the bond to arrive at the carrying value at any particular point in time
added
Carrying value for a premium bond=
Face + unamortized premium
Carrying value for a discount bond=
face - unamortized discount
Bond issue costs should be recorded as an ______ (______ _____) and _______ from the date of issuance of the bonds into expense using the straight-line method
asset; deferred charge; amortized
Under IFRS, bond issue costs are not recorded as a separate _____. Instead, they are deducted from the carrying value of the liability and amortized using the _____ ____ _____
asset; effective interest method
Periodic amortization (straight-line method)
(premium/discount) / # of periods bond is outstanding
Interest expense (for discount)=
check amount + amortization
Interset expense (for premium)=
check amount - amortization
The straight-line is not permitted under _____
IFRS
JE to record interest expense for discounted bond (borrower)
DR: bond interest expense
CR: discount on bond payable (amortization)
CR: cash (check amount)
JE to record interest revenue for discounted bond (investor)
DR: cash (check amount)
DR: investment in bonds (amortization)
CR: bonds interest revenue
JE to record interest expense for premium bond (borrower)
DR: bond interest expense
DR: Premium on bond payable (amortization)
CR: cash (check amount)
JE to record interest expense for premium bond (investor)
DR: cash (check amount)
CR: investment in bonds (amortization)
CR: bonds interest revenue
Effective interest method also known as
constant yield method
Effective interest method ______ by both GAAP and IFRS
required
Interest expense calculation under effective interest method = ___________ and goes on the ______ ______
net carrying value x effective interest rate
income statement
Interest paid = _________ and goes on the ______ ______
bond face x coupon rate
balance sheet
The difference between the interest expense and the interest paid is the _________
amortization
The straight-line has a _________ carrying value over the life of the bond than the effective interest method
higher
JE to record the sale of a bond in between interest dates (at a discount)
DR: cash
DR: discount on bonds payable
CR: bonds payable
CR: bond interest expense (for months prior to sale beginning Jan 1)
A bond sinking fund is a ______ fund (restricted cash)
trustee
A sinking fund is generally a ________ (restricted) asset
noncurrent
Serial bonds mature in _______
installments
Amortization methods on serial bonds (2):
effective interest method
bonds outstanding method
Convertible bonds are often issued at _____ than face value because of the value of the conversion feature
more
Under GAAP, the issuance price is allocated to the bonds with __ _______ of the conversion feature, because it is difficult to assign a specific value to the conversion feature
no recognition
Conversion of bonds may be recorded under either the:
book value method; market value method
Under the book value method, gain and loss is ___________
not recognized
The book value method is _______
GAAP
The book value method has no _____ _____ impact. Only ____ _____ and ______ are affected
income statement; common stock; APIC
Under the market value method, gain or loss is ______
recognized
The market value method has an _____ _____ impact
income statement
For bonds sold with detachable stock purchase warrants, the warrant is accounted for ________
separately
The value assigned to the separate conversion feature is credited to _________
APIC- Warrants
JE at issuance of bonds with detachable stock purchase warrants
DR: cash
CR: bonds payable
CR: APIC- Warrants
The ____ ______ ______ is used if only the FV of the warrants is known
warrants only method
The ____ _____ ______ is used if the FV of both the warrants and bonds are known
market value method
Calculation of the gain or loss for extinguishment of debt
reacquisition price - net carrying amount
Gain on loss from extinguishment of debt is normally reported in:
income from continuing operations
Gain or loss from extinguishment of debt can possibly be reported as an
extraordinary item
