FAR 5 - Long-Term Liabilities and Bonds Payable Flashcards
How do you account for bonds issued between interest dates?
If bond is to pay face x coupon semi annually (June 30 and December 31) and someone buys the bond on April 1st what happens?
The person buying the bond has to PREPAY the accrued interest ( Face x Coupon x (3/12)).
Selling Price + Accrued Interest = Total cash paid
What is the journal entry to record bonds issued between interest dates?
Dr: Cash
Dr: Discount on bonds payable
Cr: Bonds payable
Cr: Bond interest expense
What is the journal entry to record bond when you have year end accrual for borrower?
You need to pay interest and the dates of bond are July 1 and January 1. You need to accrue for July - Dec.
Journal entry for borrower to record interest accrual
Dr: Interest expense
Cr: Interest payable
Journal entry for borrower to record discount amortization
Dr: Interest expense
Cr: Discount on bonds payable
What is a bond sinking fund?
A bond sinking fund is a separate cash (sinking) fund set aside until maturity of the bond so company has money to pay.
How are bond sinking funds classified?
Bond sinking funds are NON-CURRENT (restricted) assets.
Journal entry to record bond sinking fund for Investor?
Dr: Bond sinking fund
Cr: Cash
Journal entry to record first semi-annual interest payment
Dr: Bond sinking fund
Cr: Interest revenue
What are serial bonds?
Serial bonds have principles that mature in installments
What are Convertible bonds AKA Nondetachable warrants?
I BUY A BOND AND I CAN SELL MY BOND FOR YOUR COMMON STOCK.
Convertible bonds are nondetachable warrants.
The bonds cannot be sold without the warrants. If you sell the bonds, you have to sell the warrants with it.
At what issuance price are convertible bonds sold?
I BUY A BOND AND I CAN SELL MY BOND FOR YOUR COMMON STOCK.
Convertible bonds are issued at MORE than face value because of the value of the conversion feature.
I BUY A BOND AND I CAN SELL MY BOND FOR YOUR COMMON STOCK.
What are the two methods of recording convertible bonds (non-detachable warrants) exchanged for common stock.
BOOK VALUE METHOD - GAAP
MARKET VALUE - NON GAAP
Define book value method of convertible bonds?
Under the book value method
NO GAIN OR LOSS
Bond payable and premium or discount is written off and common stock is credited, with APIC being credited for excess.
Define market value method of convertible bonds?
Under the market value method
GAIN OR LOSS IS RECOGNIZED
Bond payable and premium or discount is written off and common stock is credited, with APIC being credited for difference between FV of the stock and and par. The difference is loss or gain in income statement.
What are the journal entries to record book value method of convertible bonds?
1/1/x1
To record sale of bond
Dr: Cash
Cr: Bond payable
Cr: Premium on bond payable
1/2/x1
To record bonds being exchanged for Common Stock
Dr: Bond Payable
Dr: Premium on bond payable
Cr: Common Stock (at par)
Cr: APIC ( plug)
What are the journal entries to record market vale method of convertible bonds?
1/1/x1
To record sale of bond
Dr: Cash
Cr: Bond payable
Cr: Premium on bond payable
1/2/x1
To record bonds being exchanged for Common Stock
Dr: Bond Payable Dr: Premium on bond payable Dr: Loss on conversion (plug) Cr: Common Stock (at par) Cr: APIC ( Difference between par and market value)
What are detachable stock warrants? (opposite of convertible bonds - because convertible bonds are non-detachable.
The bonds can be sold without the warrants. If you sell the bonds, you don’t have to sell the warrants with it.
