Module 13b Flashcards
What are Bonds Investments?
When an individual or company invests money in a bond for an ultimate payday in the future
What is a bonds payable?
“When a company issues bonds the amount they owe are maturity are called bonds payable.”
What are some other terms for the Market rate?
“The real, yield, YRM, or the effective rate. The going rate for items on the day you issue bonds”
What are some other names for contract rate?
“The amount that is printed on the bond what you promise to pay. Also known as coupon rate, stated rate, bond rate, face rate, or nominal rate.
Will the contract rate and the contract rate be the same?.
No
If the market rate exceeds the contract rate what will happen?
The book value will be less than the maturity rate. There will be a discount on the rate
IF the market rate is less than the contract rate what will happen?
“You will have a premium on the market rate which will make up for the contract rate being above the market rate.”
What is a term bond?
A bond that matures on a single date
What is a seriel bond?
A bond that matures in installments
What is an unsecuried bond called?
A Debenture
How do you calculate the interest expense on a bond?
BV (book value, not issue amount) of Bonds * Yield rate * Time period
How do you calculate the interest payable on a bond?
FV (Face Value) of Bonds * Stated rate * Time Period
If an entity does not elect the fair value option what is done?
You record the bond at its issue price and the effecive interest method is used to amoritize any premium or discount on the bond.
To find the PV of the maturity(Bond) value you?
Take the amount of the bond * by the market rate (remember to divide if pd more than 1 per year)
To find the PV of the interest value you?
Take the implied interest (amount of bond * bond interst amount) and * by the PV of the annuity due
How will the JE’s be reported to the borrower?
They will be illustrated at gross including the premium or the discount
How will the JE’s be reported to the investor?
They will be illustrated at net (no discount or premium)
What is the compication that arrises of the year end does not concide with the interest dates?
and interest receivable should be recognized with the amoritizaiton of the discount or premium”
How are bonds issued costs treated?
“They are deferred charges, The proportional share of interst payable and are amoritized on a straight-line basis over the life of the bond. Deferred charge is a debit. It is shown under other assets, but it is not an asset.
If a bond is sold at a premium the carrying value would be higher using which Method? Effective, or straightline in years before the end date?
Effective carrying value would be higher
If a bond is sold at a discount, the carring value would be higher using which method in years before the maturity date? Effective, or straightline?
straightline carrying value would be higher
What are convertibe bonds?
Bonds that can be converted into common stock
How do you treat convertible bonds?
Basically the same as bonds payable, just put convertible before each item.”
What are the 2 methods for treating convertible bonds, if they are converted?
book value method and the market conversion method.
Under which method for converting bonds is a gain or loss not recorded?
Under the book value method
What is the typical JE to convert bonds under the book value method?
Dr. Bond Payable Dr. Bond Premium Cr. To common stock, cr. Paid in capital in excess of par”
What is the typical JE to convert bonds under the market value, assuming market value exceeds book.
dr. Loss on redemption. Dr. Bond Payable. Dr. Bond Premium. Cr. Common Stock. Cr. Paid-in excess of par.
If bond issuers try to encourage bondholders to convert their bonds to stock how do you treat these “sweeteners” expenses?
Expense upon conversion (Ordinary)
What are detachable purchase warrants?
basically these are stock options that the bondholders can purchase”
How do you account for the issuance of detachable purchase warrants and the cash proceeds from them?
you would allocate the proceeds between the deby and the stock warrants based on their market values
How do you extinguish debt?0
you pay the creditor and become relieved of all obligations relating to the debt
What is the JE to extinguish debt?
Dr (Cr) Loss (Gain). Dr. Bond Payable Dr. Bond Premium. Cr. Unamoritized issue costs. Cr. Bond Discount Cr. Cash”
What part of the income statement does the gain/loss appear?
It used to be an extraordinary item, however, it is now too common to extinguish debt early and is ordinary gain/loss
What is a bond sinking fund?
A fund where you start to accumulate the cash to pay off your bonds payable
IF you choose to make the fair value election, what day do you make that election?
On the day that the entity initially recognizes the item.
Is a bond issued with a discount or premium under the fair value option?
No
What method must an entity calculate its interest expense?
There are various methods allowed. The method must be disclosed
Where should gains or losses from using the fair value option be disclosed on the financial statements?
On the income statement for the current period
There are two methods for disclosing financial liabilities on the balance sheet under the fair value method, what are they.
1) to disclose the total fair and non-fair value amounts, with a parenthetical disclosure of the amount at fair value. 2) to present two separate line items to displat the carrying values seperatly
How are bonds held for trading treated?
They are reported at Fair market value. Income is an unrealized holding G/L and be included in Income from continued operations
How are bonds held as available for sale treated?
They are reported at fair market vlaue. Income is an unrealized holding G/L and wiould be considered other comprehensive income
How are bonds held till Maturity treated?
They are held at their carrying value, or at amortized cost. There is no unrealized holding G/L
Can IFRS elect the fair value election?
Yes
If the Yield rate is < the Face amount of a bond, what is the result?
You have a Bond Premium.
The carrying value will be higher than the carrying value of the bond
For IFRS do convertible bonds, bonds with detachable warrants, and other compound instruments have to separate their components of debt and Equity?
Yes
When the yield rate is greater than the face rate, what is the result?
You have a bond discount.
A Discount is also a situation where the carrying value is less than the face value of a Bond
