M4 - Bonds: Part 1 Flashcards
An investor purchased a bond classified as a long-term investment between interest dates at a discount. At the purchase date, the carrying amount of the bond is more than the cash paid to the seller and the face amount of the bond. (true or false)
False,
The carrying value is less than the cash paid by the investor because accrued interest is included in cash.
The carrying value is less than the face amount of the bond because it was purchased at a discount.
How to calculate GAAP interest expense
GAAP Interest Expense = Carrying value at BEGINNING of the period x effective periodic interest rate
which can also translate too
GAAP Interest Expense
———————————————— = Periodic Int Rate
Carrying value at BEG of Period
How to calculate Stated Interest Expense
Stated Interest = Amount stated on bond x stated interest rate
which can also translate to
Stated Interest
——————————– = Stated interest Rate
Amount stated on bond
Journal Entry to record an issuance on discount on bonds payable
DR: Cash
DR: Discount on Bonds Payable
CR: Bonds Payable
The bonds payable account is always credited for the entire face amount of the bonds when bonds are issued.
Bonds payable is credited when the bond is issued and then debited when the bond is extinguished (repaid or retired). (true or false)
true
What type of bonds in a particular bond issuance will not ALL mature on the same date?
Serial Bonds
Serial Bonds are bonds that mature in installments.
Term bonds are bonds that have a single fixed maturity date. (true or false)
True
Debenture bonds are unsecured corporate bonds. (true or false)
True
Under IFRS, bond issuance costs reduce the cash received from the bond issuance and are deducted from the carrying value of the liability. (true or false)
True
Journal entry to record Premium on Bonds Payable.
DR: cash
CR: Premium
CR: Bonds Payable
True or False: Under US GAAP all costs associated with the issuance of bonds should be capitalized and amortized over the outstanding term of the bonds since issue.
True
True or False: Under IFRS and US GAAP, bond issuance costs are deducted from the carrying value of the liability and included in the debit entry to bond discount upon issuance.
True, As part of the discount from par, bond issuance costs are amortized over the life of the bond using the effective interest method.
If a question gives you two interest rate, a contract interest rate and the current market rate, if the contract interest rate is greater than the yield or market rate, what will that indicate?
It will indicate this bond will sell at a premium. You should immediately anticipate that the bond proceeds will be greater than $800,000.
True or False: When a bond is issued, the price is computed as the sum of the PV of the future principal payments + PV of the future periodic interest payments.
True,
Both cash flows are discounted (this is for a discount example) at the prevailing market rate of interest that has been adjusted to reflect how the interest payments are made.
On some examples they will give you PV of ordinary annuity and PV of $1 and will want you to calculate the amount of proceeds on the sale of bonds.
You will normally use the PV of $1 to calculate the PV of the principal. You’ll take the face amount times the figure provided for the PV of $1.
You will normally use the PV of Ordinary Annuity to calculate the PV of interest payments. You’ll take an interest payment (so if it is semiannual you will take 100,000 face value x 10% interest rate / 2 to get the interest payment) x the figure provided for the PV of ordinary annuity.
