FAR 5 - Long-Term Liabilities and Bonds Payable

Question 1

What are convertible bonds?

Answer 1

Convertible bonds are convertible into common stock of the debtor at the option of the bondholder.

You issue me bonds and I will get money from you. But if I want, I can convert my bonds to your stock and get paid more.

Question 2

What are nondetachable warrants under convertible bonds?

Answer 2

Nondetachable warrants under convertible bonds is where the convertible bond must be converted into capital stock.

• A nondetachable warrant is where you have to sell the warrant and the bond together.

Question 3

What are detachable warrants under convertible bonds?

Answer 3

Detachable warrants under convertible bonds is when the warrants can be bought and sold, without having to sell the bonds.

Question 4

Define term bond?

Answer 4

A term bond has a single fixed maturity date. The entire principal is paid at the end of the term.

Question 5

Define serial bonds?

Answer 5

Serial bonds are redeemed pro rata annually. Like installments.

Question 6

Journal entry to record bonds issued at par value for borrower and investor.

Answer 6

Borrower:
Dr: Cash
Cr: Bond payable

Investor
Dr: Investment in bonds
Cr: Cas

Question 7

Journal entry to record bonds issued at discount for borrower and investor.

Answer 7

Borrower:
Dr: Cash
Dr: Discount on bond payable
Cr: Bond payable

Investor
Dr: Investment in bonds
Cr: Cash

Question 8

Journal entry to record bonds issued at premium for borrower and investor.

Answer 8

Borrower:
Dr: Cash
Cr: Premium
Cr: Bond payable

Investor
Dr: Investment in bonds
Cr: Cash

Question 9

What is stated interest rate?

Answer 9

COUPON RATE

Stated interest rate is the rate on the bond. The stated interest rate will not change.

Question 10

What is effective interest rate?

Answer 10

MARKET RATE.

Because the amount of cash to be received in the future is fixed at time bond is sold, the market will automatically adjust the issue price of the bond so the purchaser receives the market rate of interest.

Question 11

What is discount?

Answer 11

Discount is when the bond will sell for less than the face value. Market rate is greater than stated rate.

Unamortized discount on bond payable is a contra account to bonds payable. It is a direct reduction of bond payable.

The discount is amortized over the life of the bond, with amortized amounts increasing interest expense each period.

Question 12

What is premium?

Answer 12

Premium is when the bond will sell for more than the face value. Market rate is greater than stated rate.

Unamortized premium on bond payable is a contra account to bonds payable. It is a direct addition of bond payable.

The premium is amortized over the life of the bond with amortized amounts decreasing interest expense.

Question 13

How do you find carrying value of a bond?

Answer 13

1) FACE + Unamortized premium

2) FACE - Unamortized discount

Question 14

How do you record bond issuance costs under U.S. GAAP and IFRS?

Answer 14

1) Bond issuance costs include, legal fees, accounting fees, underwriting commissions, and printing.
2) Bond issuance costs are presented on the balance sheet as a direct reduction to the carrying amount of the bond, similar to discounts.
3) Bonds are recorded NET of bond issuance costs.
4) Bond issuance costs are amortized as interest expense over the life of the bond using the effective interest method.

Bond issuance costs are added into discount.

Question 15

How do you record bond issuance costs under U.S. GAAP and IFRS BEFORE THE BOND IS ISSUED?

Answer 15

If you incurred bond issuance costs on 11/1/X1, and bond is issued 12/31/X1:

11/1/X1

Dr: Deferred bond issuance costs (asset)
Cr: Cash

12/31/X1

Dr: Cash
Dr: Discount and bond issuance costs
Cr: Bonds payable
Cr: Deferred bond issuance costs

Question 16

What are the two methods of discount, premium, and bond issuance cost amortization?

Answer 16

1) Straight Line

2) Effective interest method