ch 14 long term
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38 Terms
How are interest payments on bonds recorded?
Debit Interest Expense; Credit Cash.
What must be done with bond discounts and premiums?
They must be amortized over the life of the bond.
What does straight-line amortization do?
Allocates an equal amount of bond discount or premium to each interest period.
How are bonds payable accounted for at maturity?
Debit Bonds Payable and credit Cash for the face value.
How are bonds retired before maturity accounted for?
Remove remaining discount or premium and record a gain or loss on retirement.
What causes a gain or loss on bond retirement?
The difference between the bond's carrying value and the cash paid to retire it.
How are current and long-term liabilities reported on the balance sheet?
Reported separately.
How are bonds payable shown on the balance sheet?
At their carrying amount.
What is the effective-interest amortization method?
A method that calculates interest expense using the bond’s carrying amount and market interest rate.
What rate is used to calculate interest expense under the effective-interest method?
The market interest rate at issuance.
What amount is used to calculate interest expense under the effective-interest method?
The current carrying amount of the bond.
How is interest expense calculated using the effective-interest method?
Carrying amount × market interest rate.
How is cash interest payment calculated?
Face value × stated interest rate.
What is amortized under the effective-interest method?
The difference between cash interest paid and interest expense.
How is a bond discount amortized under the effective-interest method?
The discount decreases over time.
How is a bond premium amortized under the effective-interest method?
The premium decreases over time.
What happens to carrying value when a bond is issued at a discount?
It increases over time until it equals face value.
What happens to carrying value when a bond is issued at a premium?
It decreases over time until it equals face value.
Why does interest expense change each period under the effective-interest method?
Because it is based on the changing carrying value.
Which amortization method results in varying interest expense?
The effective-interest amortization method.
Which amortization method results in equal amortization amounts each period?
The straight-line amortization method.
At maturity, what does the bond's carrying value equal?
The bond's face value.
How is Discount on Bonds Payable shown on the balance sheet?
It is SUBTRACTED from Bonds Payable (contra-liability account).
How is Premium on Bonds Payable shown on the balance sheet?
It is ADDED to Bonds Payable.
What is a bond's carrying amount/carrying value?
Face Value + Premium OR Face Value − Discount.
When is a bond issued at a discount?
When the stated interest rate is LESS than the market interest rate.
When is a bond issued at a premium?
When the stated interest rate is GREATER than the market interest rate.
When is a bond issued at face value?
When the stated interest rate EQUALS the market interest rate.
What is a secured bond?
A bond backed by specific assets of the issuer.
What is an unsecured bond?
A bond not backed by specific assets (relies on general credit of issuer).
How do you calculate amortization under effective-interest method?
Interest Expense − Cash Payment (discount) or Cash Payment − Interest Expense (premium).
Under effective-interest method with a discount, what happens to interest expense over time?
It increases.
Under effective-interest method with a premium, what happens to interest expense over time?
It decreases.
How is bond discount amortization calculated using straight-line method?
Total Discount ÷ Number of Interest Periods.
How is bond premium amortization calculated using straight-line method?
Total Premium ÷ Number of Interest Periods.
Does interest expense change under straight-line method?
No, it remains constant each period.
What is the entry to record interest expense and amortize bond discount?
Dr. Interest Expense; Cr. Discount on Bonds Payable; Cr. Cash.
What is the entry to record interest expense and amortize bond premium?
Dr. Interest Expense; Dr. Premium on Bonds Payable; Cr. Cash.