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8 Cards in this Set
- Front
- Back
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What is the PV of a bond?
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Solve time value of money for PV given:
FV = face value of bond I% = market interest rate, per period Nper = number of periods for which interest will be paid PMT = (coupon rate)(FV) Note that if coupon rate, R > Market interest rate, I, then bond sells at a discount, if R<I, then bond sells at a premium. |
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What is the journal entry for a bond sold at a premium (coupon rate > market interest rate)?
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Dr. Cash for the PV of the bond
Cr. Bonds Payable for the FV of the bond, and Cr. Premium on bonds payable (PBP) for the difference (PV-FV) |
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Why are bonds amortized?
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To allocate borrowing costs over the periods which receive the benefit of the loan. (Book value of a bond has nothing to do with its relevant value in the secondary market)
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What is the journal entry for a bond sold at a discount (coupon rate < market interest rate)?
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Dr. Cash for the PV of the bond,
Dr. Discount on bonds payable (DBP) for the difference (FV-PV) Cr. Bonds payable for the FV of the bond. |
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What are the two methods of amortization of bond expenses, and when may each be used
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1. Straight line method (can only be used when results do not differ materially from effective interest method).
2. Effective interest method (effective interest method is usually required) |
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What is the Effective interest method JE for a periodic amortization of a bond that sold at a premium (coupon payment and amortization of premium)?
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Dr. Interest Expense for (BV of bond in prev period)*(market interest rate)
Dr. PBP for (Int expense - coupon pmt) Cr. Cash for Coupon pmt |
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What is the JE for a periodic amortization of a bond that sold at a premium (coupon payment and amortization of discount)?
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Dr. Interest Expense for (BV of bond in previous period)*(market interest rate)
Cr. Cash for the coupon payment Cr. DBP for the difference |
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How does the book value of a bond change after recognizing a payment?
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Book value changes by the difference between interest expense and the coupon payment. If positive, BV is increasing (Bond sold at a discount). If negative, BV is decreasing (bond sold at a premium)
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