M5 - Bonds: Part 2

Question 1

On the issuance date, the bonds are reported at what?

Answer 1

Their issuance price.

So if a company issued 400 of its 8%, $1,000 bonds at 97 plus accrued interest,,,,,,,the bonds will be reported at their issuance price of $388,000 (97% x $400,000)

Question 2

True or False: Interest expense is recognized for the entire period from bond issuance (June 1) through the fiscal year end (December 31). (these are example dates)

Answer 2

True, so in this example it would be a period of 7 months.

Question 3

Effective Interest Method: How to calculate Interest Expense ( this goes on the income statement)

Answer 3

Interest Expense = Carrying value at BEG of period x Effective (market) interest rate [constant rate at issuance & INCLUDE bond issue costs]

Question 4

Effective Interest Method: How to calculate coupon payment (discount or premium)

Answer 4

Face value x coupon rate

Question 5

Effective Interest Method: How to calculate amortization of the discount (interest expense goes up)

Answer 5

Interest expense - interest payment (coupon)

Question 6

Effective Interest Method: How to calculate amortization of the premium (interest expense goes down)

Answer 6

Interest payment - interest expense ( coupon)

Question 7

True or False: When a discount on a bond or note is amortized, the discount amortization increases interest expense for the period.

Answer 7

True

Question 8

Journal Entry to record Interest Expense on Premium of Bonds Payable

Answer 8

DR: Interest Expense
DR: Premium
CR: Cash (or interest payable)

Question 9

Journal Entry to record Interest Expense on Discount of Bonds Payable

Answer 9

DR: Interest Expense
CR: Discount
CR: Cash (or interest payable)

Question 10

True or false: The unamortized discount on bonds payable is a contra to bonds payable. It is presented on the balance sheet as a direct reduction from the face value of the bonds to arrive at the bond’s carrying amount.

Answer 10

True

As the discount is amortized, the discount decreases and the carrying value of the bond increase.

Question 11

True or false: Accrued interest collected should be added to the bond issue proceeds upon issuance if there is any.

Answer 11

True

Question 12

True or false: The amortization of premium on bonds payable REDUCES both interest expense and carrying value. If the amortization were not done, both interest expense and carrying value would be overstated.

Answer 12

TRUE