FAR 11 - Bonds & PV Tables
How are bonds with detachable stock warrants reported?
At the relative fair market value approach. If only the fair market of one security is known, the other is a plug.
Bond issuance cost is a contra liability account, reported with a normal debit balance.
Bond issuance cost is a contra liability account, reported with a normal debit balance.
What are the 5 entries for a bond issuance?
1) Credit Bonds Payable 2) Credit Accrued Interest payable 3) Debit Cash 4) Debit Bond Issuance Cost 5) Plug a discount or a premium
Serial Bond
A bond in which principal matures in stallments
A bond is recorded at face value, but reported net of discount or premium, and bond issuance cost.
A bond is recorded at face value, but reported net of discount or premium, and bond issuance cost.
Term Bond
A bond that will pay entire maturity at end of term
Define bond sinking fund
A fund set up for the retirement of bonds. The balance is treated as noncurrent asset until the bonds mature. Any interest or dividends earned are added to the sinking fund balance and reported as income.
Bonds payable in a bonds with detachable stock warrants is recorded at the relative FMV, but reported at the carrying value. You will need to calculate the discount amount in these questions to figure out the carrying value. The discount is a plug.
Bonds payable in a bonds with detachable stock warrants is recorded at the relative FMV, but reported at the carrying value. You will need to calculate the discount amount in these questions to figure out the carrying value. The discount is a plug.
Bonds payable is always credited at face value
Bonds payable is always credited at face value
Define convertible bonds
Bonds that give the holder the option of converting bonds into common stock and are normally issued at more than par because of this option.
Convertible bond
Can be converted into a stock
What is the interest expense calculation?
Carrying amount at the beginning of the period multiplied by the effective interest rate. Divide by 2 if paid semi-annually.
What is the unamortized premium calculation?
Carrying amount minus face amount
What is the carrying amount calculation of a discount bond?
Carrying amount of the bonds in the previous period minus the amortization of the current period.
What is the carrying amount calculation of a premium bond?
Carrying amount of the bonds in the previous period plus the amortization of the current period.
How much is a bond reported at?
Carrying value, which is the bonds payable less the discount or add the premium and net of bond issuance cost.
What is the stated interest rate calculation?
Cash paid divided by face amount. Multiply by 2 if paid semiannually.
What is the amortization calculation for a premium?
Cash paid minus interest expense.
Define bond issuance cost
Costs associated with issuance of bonds and are a deduction from the carrying amount. It is a contra liability account and amortized along with discounts and premiums over the life of the bond as an adjustment to interest expense.
What is the journal entry for the warrant portion of bonds with detachable stock warrants?
Credit to Additional Paid in Capital - Warrants
What is the journal entry for a bond with warrant?
Debit cash for amount received. Multiply the relative FMV by the cash received to determine both the bonds payable amount and additional paid in capital - warrants. Plug a debit to discount.
What is the journal entry for interest expense with amortization?
Debit interest expense Credit cash Plug discount or premium
What is the effect of conversion of convertible bonds issued in excess of the bond's face amount?
Decrease to premium, decrease to bond payable, increase to common stock, increase to additional paid in capital
Disclosures should be made regarding the combined aggregate amount of maturities and sinking fund requirements for all long-term borrowings for each of the next 5 years and in the aggregate after that.
Disclosures should be made regarding the combined aggregate amount of maturities and sinking fund requirements for all long-term borrowings for each of the next 5 years and in the aggregate after that.
Discounts and premiums are reported net of amortization.
Discounts and premiums are reported net of amortization.
During the journal entry of a bonds with a detachable stock warrant, the bonds payable is always a credit to the face value, but since bonds with detachable stock warrants are reported at the relative fair market value, the difference between the face value and the relative fair market value is the discount.
During the journal entry of a bonds with a detachable stock warrant, the bonds payable is always a credit to the face value, but since bonds with detachable stock warrants are reported at the relative fair market value, the difference between the face value and the relative fair market value is the discount.
What is the unamortized discount calculation?
Face amount minus carrying amount
What is the cash paid calculation?
Face amount multiplied by the stated rate. Divide by 2 if paid semiannually/
How much is a bond recorded at?
Face value
Carrying amount
Face value plus premiums or less discounts and less any bond issue costs.
If a question asks you how much the issue price is for a $1000 bond, use $1000 in your calculations instead of the face amount.
If a question asks you how much the issue price is for a $1000 bond, use $1000 in your calculations instead of the face amount.
If an entity does not elect the fair value option, the bond is recorded at its issue price, and the effective interest method is used to amortize any premium or discount on the bond and any bond issuance costs.
If an entity does not elect the fair value option, the bond is recorded at its issue price, and the effective interest method is used to amortize any premium or discount on the bond and any bond issuance costs.
If bonds are issued at par value, that means the market interest rate is the same as the stated interest rate
If bonds are issued at par value, that means the market interest rate is the same as the stated interest rate
If effective rate is lower than stated rate, the bond is sold as a premium. If effective rate is higher than stated rate, the bond is sold at a discount.
If effective rate is lower than stated rate, the bond is sold as a premium. If effective rate is higher than stated rate, the bond is sold at a discount.
If the stated rate is 8% and the effective interest rate is 6%, 6% of the 8% is your interest and 2% is the premium that is "prepaid."
If the stated rate is 8% and the effective interest rate is 6%, 6% of the 8% is your interest and 2% is the premium that is "prepaid."
If your answers have two columns and column one has the answer A twice, and the second column has the answer B twice, your answer would probably be a combination of A in the first column and B in the second column.
If your answers have two columns and column one has the answer A twice, and the second column has the answer B twice, your answer would probably be a combination of A in the first column and B in the second column.
In a convertible bond question, if the carrying value is greater than the face value, it's a premium and there has to be a journal entry that hits your premium account. The same holds true for discounts.
In a convertible bond question, if the carrying value is greater than the face value, it's a premium and there has to be a journal entry that hits your premium account. The same holds true for discounts.
In a detachable stock warrant question, even though bonds are issued at par, there is still a discount. In regular bond questions, if it is issued at par, you are receiving par.
In a detachable stock warrant question, even though bonds are issued at par, there is still a discount. In regular bond questions, if it is issued at par, you are receiving par.
What is the effect of a bond issued with a nominal rate lower than market rate?
Increase to bond discount and increase to bonds payable.
What is the effect of a bond issued with detachable stock warrants for an amount equal to the face value?
Increase to bond discounts, increase to bonds payable, increase to common stock, increase to additional paid in capital. There is always a discount in this situation.
What is the effect of a stock dividend on a bond with stock warrants?
Increase to common stock, increase to additional paid in capital, decrease to retained earnings.
What is the effect of a convertible bond issued for an amount in excess of the bonds face amount?
Increase to premium and increase to bonds payable
What is the effective interest rate calculation?
Interest expense divided by the carrying amount at the beginning of the period. Multiply by two if paid semiannually.
What is the amortization calculation for a discount?
Interest expense minus cash paid.
Issued $1M at par at 8% stated. Debit cash for $1M and credit Bonds Payable for $1M. Each year, debit interest expense for $80,000 and credit cash for $80,000.
Issued $1M at par at 8% stated. Debit cash for $1M and credit Bonds Payable for $1M. Each year, debit interest expense for $80,000 and credit cash for $80,000.
Issued 1 million with 8 percent stated and 10 percent market rate. This is a discount. Debit cash for 900 thousand, debit discount for 100 thousand, credit bonds payable for 1 million. The discount is amortized over the life of the bond. Debit interest expense for 100 thousand, credit discount for 20 thousand, credit cash for 80 thousand.
Issued 1 million with 8 percent stated and 10 percent market rate. This is a discount. Debit cash for 900 thousand, debit discount for 100 thousand, credit bonds payable for 1 million. The discount is amortized over the life of the bond. Debit interest expense for 100 thousand, credit discount for 20 thousand, credit cash for 80 thousand.
Issued 1 million with 8 percent stated and 6 percent market rate. This is a premium. Debit cash for 1.1 million, credit premium for 100 thousand, credit bonds payable for 1 million. The premium is amortized over the life of the bond. Debit interest expense for 60 thousand, debit premium for 20 thousand, credit cash for 80 thousand.
Issued 1 million with 8 percent stated and 6 percent market rate. This is a premium. Debit cash for 1.1 million, credit premium for 100 thousand, credit bonds payable for 1 million. The premium is amortized over the life of the bond. Debit interest expense for 60 thousand, debit premium for 20 thousand, credit cash for 80 thousand.
Effective rate, yield, interest rate
Market rate of interest
Ordinary annuity is paid at the end of the period and annuity due is paid at the beginning of the period.
Ordinary annuity is paid at the end of the period and annuity due is paid at the beginning of the period.
Present value at the effective interest rate.
Present value at the effective interest rate.
What is the initial carrying amount of a bond issued?
Present value of face amount plus the present value of all future interest payments
Remember, when a question asks for how much bonds should be reported at, it is the carrying value, which is less of discounts or in addition of premium, and net of bond issuance cost. Bond issuance cost is a debit balance, a contra-liability.
Remember, when a question asks for how much bonds should be reported at, it is the carrying value, which is less of discounts or in addition of premium, and net of bond issuance cost. Bond issuance cost is a debit balance, a contra-liability.
Covenants
Restrictions that borrowers must often agree to
Define accrued interest payable
The amount of interest payable because a bond is issued not at the beginning of the year.
Stated, face, coupon, nominal rate
The amount you are paid each payment date
The carrying amount of a bond on the date of issuance is the PV of face and interest payment.
The carrying amount of a bond on the date of issuance is the PV of face and interest payment.
What is the effective interest method of amortization?
The carrying value multiplied by the effective interest rate will get you your interest expense for the year. Your interest expense minus the cash payment, or the stated payment, will get you your amortization of a discount or a premium. The amortized discount or premium reduces your discount or premium each year and you will get a new interest expense calculation each period.
The carrying value, or the reported value, of a bond is bonds payable, net of discount or premium added, and bond issuance cost.
The carrying value, or the reported value, of a bond is bonds payable, net of discount or premium added, and bond issuance cost.
What is the relative fair market value approach in relations to bonds with detachable stock warrants?
The fair market value of the bond without the warrant plus the fair market value of the warrant. The percentage of each security to the total amount is multiplied by the fair market value of each security.
Callable bonds
The issuer has the right to redeem prior to its maturity date
The journal entry for a bond being converted is similar to a bond retirement, but instead of a credit entry to cash, it is a credit entry to common stock at pair and a credit plug to additional paid in capital.
The journal entry for a bond being converted is similar to a bond retirement, but instead of a credit entry to cash, it is a credit entry to common stock at pair and a credit plug to additional paid in capital.
The market value method of converting bonds is similar to the book value method, but instead you have a plug to a gain or loss account.
The market value method of converting bonds is similar to the book value method, but instead you have a plug to a gain or loss account.
What is the journal entry for a bond retirement?
The opposite of the issuance entry, with a plug to a gain or a loss. Journal entries include unamortized premium, discount, and bond issuance cost. The cash entry is how much you are paying to retire it.
The present value of the face of a bond is the face value multiplied by the present value of a lump sum using the effective interest rate.
The present value of the face of a bond is the face value multiplied by the present value of a lump sum using the effective interest rate.
The present value of the interest as a annuity is calculated by multiplying the face times the stated rate times the number of payment periods. This number is then multiplied by the present value of an annuity, ordinary or due, at the effective interest rate. If the interest is paid semi annually, take the number of years and multiply it by two.
The present value of the interest as a annuity is calculated by multiplying the face times the stated rate times the number of payment periods. This number is then multiplied by the present value of an annuity, ordinary or due, at the effective interest rate. If the interest is paid semi annually, take the number of years and multiply it by two.
The proceeds from the issuance of bonds is calculated by determining the present value of the face of the bonds and the present value of the interest as an annuity.
The proceeds from the issuance of bonds is calculated by determining the present value of the face of the bonds and the present value of the interest as an annuity.
The stated rate is how much the bond will pay you
The stated rate is how much the bond will pay you
The sum of the first 5 periods of a present value table of a lump sum is the present value factor of an ordinary annuity at the fifth period.
The sum of the first 5 periods of a present value table of a lump sum is the present value factor of an ordinary annuity at the fifth period.
Define a bond with detachable stock purchase warrant
The warrant is a security that can be sold or exercised, while still keeping the bond. Since it is separable, it is as if two securities were issued, therefore a value must be given to both securities.
There are two ways of converting bonds, book value and market value. Book value is generally accepted, market value is not.
There are two ways of converting bonds, book value and market value. Book value is generally accepted, market value is not.
To determine the proceeds of a bond, you would have to find the present value of the principal and the present value of the interest annuity. Add both figures together to get the present value of the bond, and debit cash for this amount. The difference between this and bonds payable is the discount or premium.
To determine the proceeds of a bond, you would have to find the present value of the principal and the present value of the interest annuity. Add both figures together to get the present value of the bond, and debit cash for this amount. The difference between this and bonds payable is the discount or premium.
To go from annuity due to ordinary annuity, use the factor for one more period and subtract 1 from it.
To go from annuity due to ordinary annuity, use the factor for one more period and subtract 1 from it.
To go from ordinary annuity to annuity due, use the factor for one less period and add 1 to it.
To go from ordinary annuity to annuity due, use the factor for one less period and add 1 to it.
Under IFRS, bonds are reported for at amortized cost using the effective interest method or through fair value through profit or loss. Straight line is not used.
Under IFRS, bonds are reported for at amortized cost using the effective interest method or through fair value through profit or loss. Straight line is not used.
Under IFRS, compound instruments, such as convertible bonds, are accounted separately. The liability, or bond, portion receives a value, and the equity section is the residual value, or a plug.
Under IFRS, compound instruments, such as convertible bonds, are accounted separately. The liability, or bond, portion receives a value, and the equity section is the residual value, or a plug.
Under IFRS, the bond portion of a compound instrument is recorded at fair value and the equity component is recorded at the residual amount.
Under IFRS, the bond portion of a compound instrument is recorded at fair value and the equity component is recorded at the residual amount.
Under generally accepted, bonds may be reported at straight line if it is not materially different. Straight line is not consistent with generally accepted, therefore they mostly use amortized cost. Under International, straight line may not be used.
Under generally accepted, bonds may be reported at straight line if it is not materially different. Straight line is not consistent with generally accepted, therefore they mostly use amortized cost. Under International, straight line may not be used.
Under the book value method of converting bonds, there is no gain or loss entry.
Under the book value method of converting bonds, there is no gain or loss entry.
Under the market value method of converting bonds, common stock and additional paid in capital should be the fair market value of the stocks issued, with a plug to a gain or loss. Common stock is always recorded at par.
Under the market value method of converting bonds, common stock and additional paid in capital should be the fair market value of the stocks issued, with a plug to a gain or loss. Common stock is always recorded at par.
Under the relative fair market value approach, once you calculate the percentages, multiply that by the proceeds.
Under the relative fair market value approach, once you calculate the percentages, multiply that by the proceeds.
Understand when to multiply and when to divide by two when bonds are paid semi-annually.
Understand when to multiply and when to divide by two when bonds are paid semi-annually.
Debenture bonds
Unsecured bonds that are not supported by any collateral
When someone exercises a convertible bond, treat it as if you are issuing one security.
When someone exercises a convertible bond, treat it as if you are issuing one security.
When you perform a discount amortization, the carrying value and interest expense increases each period. The opposite is true for a premium amortization.
When you perform a discount amortization, the carrying value and interest expense increases each period. The opposite is true for a premium amortization.
