Section 11 - Bonds and PV Tables Flashcards
What is a Term Bond?
Matures on a SINGLE DATE
What is a Serial Bond?
Matures in INSTALLMENTS
What is a Debenture Bond
Unsecured
What is a Sinking Fund Bonds?
Cash held for Bond Repayment. Requires 5 years of Disclosures.
What is the “stated, face, coupon, and nominal rate”?
The rate printed on the bond.
Represents the amount of cash the investor will receive every payment.
What is the “effective rate, market interest rate, and yield rate”?
The rate that the bonds are currently selling for.
What happens when the Market Rate > Stated Rate?
Bond will be sold at DISCOUNT.
Difference between the rates is made up by the buyer purchasing the bond for LESS than par value.
What happens when the Market Rate
Bond will be sold at a PREMIUM.
Difference between the rates is made up by the buyer purchasing the bond for MORE than par value.
What is the Carrying Amount of the bond?
Bond amount aka Face +- Premium or Discount
Also called Book Value or Reported Amount. It will initially be the same price as the issue price, but gradually approaches the face value as time passes, since the premium or discount is amortized over the life of the bond.
What is Convertible Bond?
Bonds that can be converted to STOCK
What is Callable Bond?
Bond which the issuer has the right to redeem prior to its maturity date.
How do you calculate the Present Value of the Bond Proceeds?
PV of the Face of the bond = Face x PV
-Use the Market/Yield Rate and not the Stated Rate
PV of the interest as an annuity = Face x Stated Rate x PV of Market/Yield Rate
Sum of these two equal PV of the bond
What are included in Bond Issue Costs (BIC)?
Printing and engraving Legal and accounting fees Underwrite Promotion costs Registration
How are BIC treated?
Debited to a Deferred Charge account (non current assets) and amortized over the life of the bond using S/L
Time of amortization begins when ISSUED
EXAMPLE: 5-year bonds date April 1
Bonds arent issued until Sept 1
BIC amortized over 55 months instead of 60 months (April - Sept is 5 months)
What is the J/E for Sale of Bonds?
- Cash (% face + accrued interest - BIC)
- BIC
- Discount (plug)
- Bond Payable (Face)
- Accrued Interest Payable
- Premium (plug)
How are the bond discount or premium amortized?
Effective interest method (GAAP and preferred)
or
Straight-line (NOT GAAP)
What is the calculation for Discount/Premium Amortization?
Face +- Premium/Discount = CV x Effective interest rate = Interest expense - cash payment = Amortization of discount
Cash = Face x Stated Rate (this number always stay the same)
JE for Discount
Interest Expense XXX
Discount XXX
Cash XXX
JE for Premium
Interest Expense XXX
Premium XXX
Cash XXX
Is interest expense increasing or decreasing when amortizing a discount and premium?
Discount - interest expense increases each year and amortization increases each year
Premium - interest expense decreases each year and amortization increases each year
When bonds are retire, how are the gains/losses treated?
Gain/loss reported as Continuing Operations on the I/S. May be reported as Extraordinary if both unusual and infrequent.
JE Bonds Payable (face) Premium (unamortized) Loss (plug) BIC Discount Cash Gain (plug)
What is a Convertible Bonds?
Bonds that can be converted to stock
What are the two ways to convert the Convertible Bonds?
1) Book Value Method (GAAP)
- No gain/loss
2) Market Value Method (Not GAAP)
- Has gain/loss and they are not extraordinaire
What is the J/E for Book Value Method?
Bonds Payable (face) Premium BIC Common Stock (par value) APIC (plug)
What is the J/E for Market Value Method?
Bonds Payable (face) Premium Loss (plug) BIC Common Stock (par value) APIC Gain (plug)
Under IFRS, what valuation method should a company use to report their bonds on their financial statements?
Either Amortized Cost or FVTPL
