FAR-F5-M5-Bonds Part 2 Flashcards
Is the following statement true or false. Under U.S. GAAP, the period over which to amortize a premium or a bond discount and bond issuance costs is the period that the bonds are outstanding, (i.e. from the date that the bonds are sold).
True. Under U.S. GAAP, the period over which to amortize a premium or a bond discount and bond issuance costs is the period that the bonds are outstanding (i.e. from the date that the bonds are sold).
What are two bond amortization methods?
The two bond amortization methods are the straight line method and the effective interest method.
Is the straight line method for bond amortization U.S. GAAP?
No, the straight line method is not in conformity with U.S. GAAP.
Is the following statement true or false. To amortize a discount, premium or bond issuance costs using the straight line method, simply divide the unamortized discount or premium by the # of periods the bonds are outstanding and amortize the same amount of discount or premium each period. This will result in consistent dollar amount of interest expense each period.
True. To amortize a discount, premium or bond issuance costs using the straight line method, simply divide the unamortized discount or premium by the # of periods the bonds are outstanding and amortize the same amount of discount or premium each period. This will result in consistent dollar amount of interest expense each period.
What is the formula for interest expense using the straight line method for bond amortization?
interest expense = coupon payment + Discount Amortization Expense or - Premium amortization expense.
where the coupon payment = face value of the bond * stated interest rate
Regardless of using the straight line method or the effective interest method, when the bond premium or discount is fully amortized, will the carrying value of the bond be the same regardless of the method used?
Yes, the straight line method and effective interest method of amortization will result in different carrying values while the bond is still active. But when it has been fully amortized, the carrying value of the bond will be the same regardless of the method used.
If bonds are sold between interest payment dates, will the amount of interest that has accrued since the last interest payment be added to the price of the bond?
Yes. Interest payments on bonds are generally made semiannually, however honds are usually sold between interest dates, which requires additional entries for accrued interest at the time of sale. The amount of interest that has accrued since the last interest payment is added to the price of the bond.
If bonds are sold between interest payment dates, will the amount of interest that has accrued since the last interest payment be added to the price of the bond?
Yes. Interest payments on bonds are generally made semiannually, however bonds are usually sold between interest dates, which requires additional entries for accrued interest at the time of sale. The amount of interest that has accrued since the last interest payment is added to the price of the bond.
Selling Price of Bond
PLUS accrued interest
EQUALS total cash received
Example of JE to record sale of bond with accrued interest:
Dr. Cash (selling price + accrued interest) 951,399
Dr. Discount on Bonds Payable (plug) $73,601
Cr. Bonds Payable (face value of bond) ($1,000,000)
Cr. Bond Interest Payable ($25,000)
Example of JE to record first interest payment
Dr. Bond Interest Expense $27,791.97
Dr. Bond Interest Payable $25,000
Cr. Cash ($50,000)
Cr. Discount on Bonds Payable (plug) ($2791.97)
Should bond interest be accrued at year end if the cash interest payment isn’t due yet?
Yes, bond interest should be accrued even if no cash payment has been made.
