Define the following types of bonds: (1) debenture, (2) mortgage, (3) collateral trust, (4) convertible
(1) unsecured bonds
(2) secured by real property
(3) secured by a particular asset
(4) convertible to common stock either by turning in the bond itself (nondetachable warrants) or by turning in a coupon (detachable warrant)
How is the market rate (yield) of a bond calculated?
Coupon Rate / Price of the Bond
Define the following types of bonds: (1) participating, (2) term, (3) serial, (4) zero coupon
(1) these have a stated rate of interest plus participate in income if certain earnings are obtained
(2) have a single, fixed maturity date (typical bond)
(3) the issuer redeems these on a pro rata basis
(4) “deep discount” bonds, have no stated interest, but are purchased for small money and then redeemed at face value
What is the coupon rate?
The stated rate on the bond
How is the bond’s selling price calculated?
USE THE MARKET RATE WHEN FINDING PV FACTORS
The PV of the future principal payment (face amount) PLUS. Use the PV of $1
The cumulative amount of the interest payments. Use the PV of annuity or annuity due
What are the journal entry accts for both the borrower and the investor for the issuance of bonds at a premium?
Borrower
[DR] Cash (the amount received for the bond
… [CR] Bond Payable
… [CR] Premium
Investor
[DR] Investment in Bond
… [CR] Cash
True / False: For a bond payable semiannually, the interest is accrued monthly.
True
What is the process to amortize a bond issued at a premium? What are the journal entry accts?
Step 1: Calculate the interest payment = bond face amt x stated (coupon) rate
Step 2: Calculate the interest expense = bond carrying amount at the beginning of the period x market rate
Step 3: Calculate the amount of premium used = interest expense – interest pmt
Step 4: Adjust the balance = selling price of the bond – premium used
[DR] Interest Expense
[DR] Premium
… [CR] Interest Pmt
What is the process to amortize a bond issued at a discount? What are the journal entry accts?
Step 1: Calculate the interest payment = bond face amt x stated (coupon) rate
Step 2: Calculate the interest expense = bond carrying amount at the beginning of the period x market rate
Step 3: Calculate the amount of discount used = interest expense – interest pmt
Step 4: Adjust the balance = selling price of the bond + discount used
[DR] Interest Expense
… [CR] Discount
… [CR] Interest Pmt
How are bond issuance costs accounted?
Presented on the B/S as a direct reduction to the carrying amount of the bond, and frequently included in the same entry as the bond discount.
Issuance costs are amortized as interest expense over the life of the bond using the effective interest method (just like a discount)
True / False: Bond amortization using the straight-line method is approved by GAAP
True
It is allowed, but not considered GAAP
True / False: Bond amortization using the straight-line method is approved by IFRS
False
Only the effective interest method is allowed by IFRS
A bond is issued between interest dates. What adjustments are made for this situation? What are the journal entry accts assuming the bond is issued at a discount?
The accrued interest is paid by the bond purchaser (the investor), but is then returned with a full interest payment
[DR] Cash (the amount the investor paid for the bond plus the accrued interest
[DR] Discount on Bond
… [CR] Bond Payable
… [CR] Bond Interest expense (it could be listed as a payable)
