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Flashcards in Bonds Deck (88):
1

What is the Face Maturity Value of a Bond?

The amount paid to the bondholder at maturity. This amount is often $1,000

2

What is a Bond's stated (coupon) interest rate?

The rate at which the bond pays cash interest. The rate is stated on the bond. If the rate is 6% and the bond's face value is $1,000, then one bond pays $60 interest each year.

3

What is the norm for Bond interest payment dates?

Two interest payment dates per year. These are the dates the bond pays cash interest.

4

What is the Bond issuance date?

Date the bonds are issued. This information is not on the bond.

5

What are Bond Issue Costs

The cost of the following related to bond issuance:

1) Printing

2) Registering

3) Marketing

6

What is the Bond Price?

The current market price of a bond exclusive of accrued interest

7

What are the 4 main classifications for bonds?

1) Secured vs. Unsecured (Debenture) 2) Serial vs single maturity term 3) Callable vs. Redeemable 4) Convertible vs Non-convertible

8

What is the entry to record the issuance of the Bond?

Cash Discount on bonds payable Bonds Payable OR Cash Bonds Payable Premium on Bonds Payable

9

What happens when Stated rate > Market rate?

A premium occurs because the bond is paying MORE than the market rate.

10

What happens when the 

Stated Rate < Market Rate?

A discount occurs because the bond is paying BELOW the market rate. The less the bonholder pays for a bond, the higher the yield rate. Discounts are more common than premiums.

11

When are bonds sold at a discount?

When stated rate < market rate.

12

Define "maturity date."

The date the maturity value is paid, the end of the bond term.

13

Define "issuance date."

The date the bonds are actually issued.

14

When are bonds sold at a premium?

When stated rate > market rate.

15

What method is required for premium/discount amortization?

Effective interest method.

16

Define "secured bonds."

Bonds that have a claim to specific assets.

17

Describe three general aspects about the valuation of all long-term liabilities.

  1. Initially recorded at the present value of future cash flows;
  2. Interest and amortization are recognized at the market interest rate the date the liability was established;
  3. Interest expense equals the liability balance at the beginning of the period times the market rate of interest the date the liability was recorded.

18

Define "bond."

A financial debt instrument that typically calls for the payment of periodic interest (although a zero-coupon bond pays no interest), with the principal being due at some time in the future.

19

Define "serial bonds."

  • Bonds that mature at regular or staggered intervals.
  • Serial bonds mature at regular intervals rather than on one single date

20

Define "bond date."

The first possible issuance date.

21

How do you calculate

Bond Interest Expense?

Bond Carrying Value

(Make sure this is the actual amount sold or purchased)

x

Market or Yield Rate 

(make sure to divide the % accordingly by the # of payments in a year)

 

Watch out for questions regarding 1/2 a year!

 

22

What are the two criteria's

for Reclassifying

CL --> NCL? 

  1. Intent
    • Board of Director's Meetings
    • Documentation (Agreement) from financial institution.
  2. Abilitiy
    • Must occur between balance sheet date
    • Must occur before the date the financial statements are issued or are available to be issued.

23

What is the 

Effective Interest Method?

Determines amortization of premium of discount by determining the difference between the Interest Expense and Interest Paid.

 

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24

What is the purpose behind the amortization of discounts and premiums?

  1. To adjust interest expense to reflect the market rate of interest
  2. To ensure that the Book Value = Face Value at maturity.

Purpose of amortization is to transfer the discount or premium to interest expense over the life of the bond.

25

What is the JE at bond issuance?

Cash [How much Bond was sold]

     Bonds Payable [ Face Value of Bond]

Plug premium or discounts accordingly.

26

What is the Amortization JE for Bonds?

Interest Expense   [BV x Market %]

      Cash                [Face Value x Stated Rate]

"Plug" discount or premium accordingly.

27

How do you determine the 

Issue Price of a bond?

1) Calculate the PV of the principal

   [Bond principal x PV $1 using Market Rate]

                                 +

2) Calculate PV of interest payments

   [Bond Principal x Stated Rate x PV of Annuity of $1]

28

When a bond is purchased, the present value of the bond's expected net future cash inflows discounted at the market rate of interest provides what information about the bond?

The Price

The bond price is the present value of the future cash payments to be paid by the issuer over the bond term.

29

What is the JE for Bond Amortization?

Interest Expense [BV x Market rate]

     Cash  [Face value x stated rate]

Plug discount and premium accordingly.

 

30

Under the Effective Interest Method,

how do you calculate Interest Payable?

Face Value of the bond x stated rate

31

What type of bond matures in installments?

Serial bonds mature serially according to a schedule set in the bond contract. At each date, a portion of the bond issue is paid off (matures) until the entire face value of the issue is retired.

Each portion is a percentage of the total face value of the issue. Serial bonds are designed to reduce the risk, to the bondholder, of default by the issuing firm.

32

What is a callable Bond?

An issuer can retire callable bonds before maturity at a specified price

33

What is a redeemable bond?

The bondholder can require a redeemable bond to be retired early.

34

What is a convertible bond?

A convertible bond can be converted into capital stock by the bondholder.

35

What is a Secured Bond?

A secured bond issue has a claim to specific assets. Otherwise, the bondholders are unsecured creditors and are grouped with other unsecured creditors

36

What is an Unsecured Bond?

An unsecured bond is backed only by the credit rating of the issuing firm and is called a debenture.

37

What is Debenture Bond?

  • An unsecured bond that is backed only by the credit rating of the issuing firm.
  • Debenture bonds can be serial bonds

38

What is the Straight Line Method 

of Bond Amortization?

This method recognizes a constant amount of amortization each month of the bond term.

The SL method recognizes the average amount of discount amortization every period, which must be larger than under the effective interest method early in the bond term. 

  1. Higher Interest Expense
  2. Lower Retained Earnings
  3. Higher Bond Carrying Value

39

When debt is issued at a discount, interest expense over the term of debt equals the cash interest paid...

Plus discount

When debt is issued at a discount from face value, the firm receives an amount less than face value but must pay the face value at issuance.

40

What type of bonds in a particular bond issuance will not all mature on the same date?

Serial Bonds

Serial bonds mature according to a schedule. For example, after 20 years, 10% of the bonds may be retired at the end of each of the next 10 years. The bond term ends at the end of the 30th year.

41

A company issued a bond with a stated rate of interest that is less than the effective interest rate on the date of issuance. The bond was issued on one of the interest payment dates. What should the company report on the first interest payment date?

An interest expense that is greater than the cash payment made to bondholders.

42

How do you determine Future Value of a $1

Dollar Amount / PV factor of $1

43

The market price of a bond issued at a discount is the present value of its principal amount at the market (effective) rate of interest

Plus the present value of all future interest payments at the market (effective) rate of interest.

The issue or market price of a bond at date of issuance is the present value of all future payments using the market (effective, yield) rate. The interest payments are an important part of the total return to the investor. The present value of only the face value would often be 1/2 or less of the total present value of the bond.

44

What is the length of a bond term when bonds are issued between interest dates?

Period of time from issuance date to maturity date.

45

How are bond issue costs accounted for?

Treated as a direct reduction from the debt carrying value and amortized to interest expense over the term of the bonds.

46

Define "stated rate"

Rate listed on the bond and used to calculate accrued interest.

47

Define "bond proceeds."

The sum of the bond price and any accrued interest.

48

How many months of interest are collected at issuance when bonds are issued between interest dates?

Number of months between the most recent interest payment date and the date of issuance.

49

Define "bond issue costs".

The costs of printing, registering, and marketing the bonds.

50

How do you calculate realized net cash recepits from bond issuance?

Total Bond Price

+

Accured Interest

(Bond Face x Stated Rate)

Bond Issue Costs

51

How Do you calculate 

Bond Proceeds + Accrued Interest

when bond is issued between dates?

Amount Issued 

+

Accrued Interest

(Bond Face x (months/12) x annual stated rate)

 

* Even if the bond pays semi-annual, we need to calculate the accrued interest between dates, so keep it annual and calculate relevant months accordingly out of 12 months.

52

How do you calculate 

Bond Net Carrying Value?

Face Value

— Discount

— Issue Costs

= Bond Net Carrying Value

53

What is the proper accounting for 

Bond issue expense?

Bond issue costs are NOT expensed immediately.

They are capitalized and amortized over the bond term.

54

How much cash is received 

when the bond issuance includes

accrued interest?

Bond Issued Amount 

x Stated Rate

x (Bond start date / Bond issue date)

= Total Bond Issuance Received

Pay attention to the timing of the transactions.

Count only full months in the numerator.

 

 

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55

How do you calculate 

net cash received

from bond issuance?

Total Bond Price Issued

+ Accrued Interest

- Bond Issue costs

= Net Cash Received  

56

How do you calculate 

Bond Interest Payable?

Bond Face Value

x stated rate

x (relevant months / 12)

= Bond Interest Payable

57

How do you calculate 

Accrued Interest with Bonds?

Bond face amount

x interest rate

x (relevant months / 12)

= Accrued Interest

*Note : Interest begins to accrue after each payment is made. So be aware of the semi-annual payments and account only for those after a semi-annual payment, because those are interests that need to be accrued.

58

How do you do you calculate

Unamortized Bond Issue Costs?

[(Original Bond Term — Time Elapsed since Bond Start date)  / Original Bond Term]

x Bond Issue Cost

= Unamortized Bond Issue Costs

You can convert the time frame in months if needed, but be sure to convert the numerator and denominator in months as well.

 

59

When a convertible bond is issued, how are the proceeds treated?

The same as a nonconvertible bond. Nothing allocated to the conversion feature.

60

What is the market value method of recorded converted debt?

The more reliable of market value of the stock or bonds is allocated to the capital stock account and contributed capital in excess of par account.

A gain or loss is recorded equal to the difference between the total market value recorded and the remaining book value of the bonds.

61

What amount is allocated to owners' equity on issuance of convertible bonds that can be settled in cash?

Issuance price less the present value of the bonds using the prevailing rate on similar bonds.

62

What is the accounting treatment by the issuer for additional consideration paid to induce conversion of convertible bonds?

Recognize expense for the fair value of the additional consideration.

63

What is the book value method of recording converted debt?

Under the book value method, the book value of the bonds converted is transferred to the common stock account and additional paid-in capital. No gain or loss is recorded.

Under the book value method, the owners' equity of the issuing firm is increased by the book value of the debt converted

64

What is the accounting treatment for convertible bonds with a beneficial conversion feature?

The excess of fair value of the stock to be issued upon conversion (measured at the date of issuance) over the face value of the bonds, is allocated to owners' equity.

65

Bonds are unaffected by conversion feature until what point in time?

Until conversion takes place.

66

What method of recording converted debt does not recognize a gain or loss?

Book value method.

67

What is an example JE 

for the Book Value Method 

of convertible bonds?

Bonds Payable

Premium

           Common Stock

           Contributed Capital in Excess of Par

Market data is not used to determine Common Stock amount (use par)

68

Cash proceeds from the issuance of convertible bonds should be reported as...

A liability for the entire proceeds

There is no method of objectively determining the value of the conversion feature for a convertible bond. The conversion feature is not separable as is the case with detachable stock warrants. 
Thus, the entire proceeds are allocated to the bond liability, which in this case includes a premium.

 

69

What is the Journal Entry for

the conversion of a bond to a stock?

Bonds Payable

    Discount on Bonds Payable

    Common Stock

    Contributed Capital in excess of par

Plug loss if applicable

Market value per share is NOT used to determine common stock amount.

70

What is the journal entry for the

Book Value Method?

Bonds Payable

     Discount on Bonds Payable

     Common Stock

     Contributed Capital in Excess of Par 

 

71

How does the Book Value method increase the equity account?

Under the book value method, the owners' equity of the issuing firm is increased by the book value of the debt converted.

72

What is the Journal Entry to transfer the Book Value of  the convertible bonds to owners' equity accounts?

Convertible Bonds Payable

Premium on convertible bonds payable

     Common Stock

      APIC, Common Stock

 

The entry closes the bond-related accounts, and opens the new owners' equity accounts related to the stock issued on conversion. The common stock account represents the par value of the newly issued shares, and the additional paid-in capital represents the excess of the book value of the bonds on the date of conversion, over the par value of stock 

73

What is the market value method of recording converted debt?

Under the market value method, the stock issued is recorded at its market value.

 

Gains or losses are recognized.

74

How should the issuance of bonds with detachable warrants be recorded when the market value of both are known?

Proceeds are allocated to eachissue based on the respective fair market values of the securities.

75

How should bonds with detachable warrants be accounted for after issuance?

Unaffected by warrants; amortize premium or discount.

76

How should the exercise of detachable warrants be accounted for?

Debit cash for exercise price, debit detachable warrants, credit common stock and additional paid in capital (APIC).

77

How should the issuance of bonds with detachable warrants be recorded when only one market value is known?

Proceeds equal to the fair market value are allocated to that security, and the incremental proceeds are allocated to the remaining security.

78

What is the purpose of detachable stock warrants?

To increase marketability of bond issue.

79

What happens when only the market value of the warrant is known?

The warrants are recorded at market value.

The amount of proceeds allocated to the warrants are recorded in an owner's equity account.

80

What is a Bond with detachable warrants?

When bonds are sold with detachable stock warrants, the issuing company is actually selling two securities in a single transaction.

  1. Bond price allocated between bonds payable
  2. Stock warrants based on fair values

 

81

What is the journal entry when

Bonds with detachable warrants are exercised?

Cash

Detachable Stock Warrants

     Common Stock

     Contributed Capital Excess of par

82

What is the journal entry when 

bonds with detachable warrants expire?

Detachable Stock Warrants

       Contributed Capital — Expired Warrants

83

What happens when

Fair Values are known

for bonds with detachable stock warrants?

Record any premium or discount based only on the allocation to the bonds.

84

What happens when only the market value of the stock warrant is known?

The warrants will be recorded at market value and the proceeds will be allocated to the warrants.

The amount of proceeds allocated to the warrants is recorded in an owner's equity account .

 

85

When market values are known for bonds and warrants, how do you calculate the allocations to the following:

  1. Bonds without warrants
  2. Warrants

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86

What does the journal entry look like for the bond issuance when both when both market value's are known?

Cash

Discount on Bonds

     Detachable SW (Owner's Equity)

     Bonds Payable (Face Value)

      

87

Regarding Bonds and Warrants, 

what happens when only one market value for a security is available?

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88

What is the journal entry

when stock warrants expire?

Detachable Stock Warrants

     Contributed Capital - Expired warrants