Test 3-Bonds and redemption Flashcards
2 methods of amortization
- straight-line method
- interest method
If the MR is less than CR, the bonds will sell for _____ than their face amount. This is because investors are willing to pay more for bonds that pay a higher contract rate of interest than the rate they could earn on similar bonds (market rate).
more (PERMIUM)
the premium amortization decreases what 3 things?
- interest expense
- CR to equal MR
- carrying amount of bonds (Cash Proceeds/BV) to equal the Face Amt.
A corporation may redeem or call bonds before they mature. This is often done when?
In such cases, the corporation may issue new bonds at a _________ and use the proceeds to redeem the original bond issue.
the MR of interest declines below the CR of interest.
lower interest rate
_______ bonds can be redeemed by the issuing corporation within the period of time and at the price stated in the ____________.
Normally, the call price is ________________________. A corporation may also redeem its bonds by purchasing them on the open market.
Callable
bond indenture
above the face value.
A corporation usually redeems its bonds at a price …..
The carrying amount (BV) of bonds payable is the …..
different from the carrying amount (or book value) of the bonds
face amount of the bonds less any unamortized discount or plus any unamortized premium.
A _______ is recorded if the price paid for redemption is below the bond carrying amount. (BV> Cash paid)
gain
A ______is recorded if the price paid for the redemption is above the carrying amount. (BV<Cash paid)
Loss
An ___________ is a debt that requires the borrower to make equal periodic payments to the lender for the term of the note.
installment note
Unlike bonds, each note payment includes the following: (2)
- Payment of a portion of the principal (amount initially borrowed.)
- Payment of interest on the outstanding balance
