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45 Cards in this Set
- Front
- Back
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Bond discount |
Market rate > contract rate BV is less than maturity value |
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Bond premium |
Market rate < contract rate BV is more than maturity value |
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Market value of a bond |
maturity value and interest payments discounted to the present |
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Unsecured / debenture bonds |
supported by full faith of credit by the company2 |
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Term bonds |
Principal comes at the end |
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Serial bonds |
Parts of the principal come until the maturity |
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Steps for bond valuation |
1. Find the PV of the maturity value at market rate (using market rate for PV) 2. Find the PV of the annuity (using the contract rate to determine the payment amount and using market rate for PV) 3. Add |
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Fair value option for bonds |
No discount or premium
Record gain/loss in revaluing the bond to FV = What was paid for the bond - FV |
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Can FV option for bonds be applied to individual bonds? |
Yes |
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If the fair value of a liability is significantly affected by instrument-specific credit risk when using the fair value option for bonds |
disclosures must also indicate the estimated amount of gains and losses from fair value changes that are attributable to changes in the credit risk |
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Disclosure for fair value option of bonds |
Aggregate FV - aggregate unpaid principal balance |
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Methods of disclosing the FV option for bonds on the balance sheet |
1. Disclose the total fair value and non–fair value amounts in the aggregate, with parenthetical disclosure of the amounts measured at fair value.
2. Present two separate line items to display the fair value and non–fair value carrying amounts separately. |
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Bond discount amortization = |
Interest expense - Interest payable |
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Effective interest revenue/expense = |
Net book value * effective rate |
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Where is interest expense of bonds reported? |
Other expenses or losses |
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Journal entry for interest revenue |
DR Cash CR Interest revenue Bond investment |
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Journal entries if the issuance date doesn't line up with the bond date/interest payment date
Example: issued in July, dated April and paid April and October |
The bond holders have to pay three months (July-September) of interest up front
Cash Discount Bonds payable Interest payable |
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Interest expense = |
Market rate * CV |
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Interest payable = |
Bond rate * Principal |
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Reporting bond issue costs |
Treated as deferred charges and amortized on a straight line basis over the life of the bond |
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Net issuance price of bonds = |
Bond issue price - bond issue costs |
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Convertible bonds definition |
Can convert the bonds into common stock |
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Recognizing sweeteners of convertible bonds |
Recognize as an ordinary expense upon conversion
Expense = FV of all securities transferred - FV of the securities issuable per the original conversion terms |
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Method 1 of reporting convertible bonds |
Value at transaction cost (BV of bonds) |
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Method 1 of reporting convertible bonds journal entry upon conversion |
Bonds payable (original face value) Bond premium (these two equal bond CV) Common stock (par) Paid in excess to par (these two equal stock BV) |
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Method 2 of reporting convertible bonds |
Value at market (of stocks or bonds) |
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Method 2 of reporting convertible bonds journal entries assuming a premium
Issuer entry |
Loss on redemption (plug; MV stock - BV bonds) Bonds payable (BV) Bond premium (BV) Common stock (par) Paid in excess of par (mkt-par) |
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Method 2 of reporting convertible bonds journal entries assuming a premium
Investor entry |
Stock investment (mkt) Investment in bonds (CV) Gain on conversion (plug; MV stock - BV bonds) |
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Reporting debt issued with detachable warrants |
The proceeds of debt issued with detachable stock purchase warrants are allocated between debt and stock warrants based on relative market values |
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Allocating proceeds of debt issued with detachable warrants |
Bonds with detachable warrants par * (market value / total market value of warrants and bonds) |
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Journal entries for allocating proceeds of bonds with detachable warrants |
Cash (amount paid for bonds) Discount on bonds payable (Proceeds - allocated to bonds) Bonds payable, face (par) APIC - warrants (plug; allocated to warrants)
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Carrying value of bonds of bonds with detachable warrants |
Face value of bonds with detachable warrants (Discount on bonds payable from JE) = Carrying value of bonds |
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Gain (loss) on extinguishment of debt = |
bond's reacquisition price - net book value |
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Book value of bond upon extinguishment of debt = |
Face value + unamortized premium and issue costs |
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Disclosures for extinguishment of bond debt |
Bond sinking fund requirements Maturity date for five years after the balance sheet date |
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Bond sinking fund account type |
Noncurrent asset |
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Bonds payable account type |
Bonds payable |
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Electing FVO for held to maturity investments |
Treat like a trading security |
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Electing FVO for available for sale investments |
Treat like a trading security |
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Trading security: Interest? Amortization schedule? Gains/losses from marking to FV? |
Has interest Has amortization schedule Have to mark up/down into other revenues or gains or loss |
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Available for sale security: Interest? Amortization schedule? Gains/losses from marking to FV? |
Has interest Has amortization schedule Have to mark up/down into OCI net of tax effects or loss |
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Held to maturity: Interest? Amortization schedule? Gains/losses from marking to FV? |
Has interest Has amortization schedule Have to mark up/down into OCI net of tax effects or loss |
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IFRS: Compound instruments |
Known as convertible or detachable warrant stocks in GAAP
Financial instruments with characteristics of both debt and equity
Must be separated into those components and reported separately |
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IFRS: Fair value through profit or loss |
Known as the FVO in GAAP
Liability is revalued at the end of the reporting period and the resulting gain or loss is recognized in profit or loss |
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What changes the bond sinking fund balance |
Periodic additions are made to the fund Revenues are earned on investments held in the fund |
