BUS 385 - Chapter 14 Flashcards

What is the effective interest method of bond amortization?

A method that calculates interest expense by multiplying the carrying value of the bond at the beginning of the period by the effective interest rate.

How is the carrying value of a bond calculated at issuance?

The present value of the bond's future cash flows (interest payments and principal) discounted at the market rate of interest.

What is the journal entry for the issuance of bonds at face value?

Debit Cash, Credit Bonds Payable.

What happens to the carrying value of a bond issued at a discount over time?

The carrying value increases until it equals the face value at maturity.

What happens to the carrying value of a bond issued at a premium over time?

The carrying value decreases until it equals the face value at maturity.

How is interest expense calculated under the effective interest method?

Carrying value of the bonds at the beginning of the period multiplied by the effective interest rate.

What is the formula for the debt to total assets ratio?

Total debt divided by total assets.

What does the current ratio measure?

A company's ability to pay short-term obligations or those due within one year.

What is the formula for the current ratio?

Current assets divided by current liabilities.

How is a gain or loss on bond redemption calculated?

The difference between the reacquisition price and the net carrying value of the bonds at the date of redemption.

What are bond issuance costs?

Costs such as printing, legal, and accounting fees incurred to bring a bond issue to market.

How are bond issuance costs typically treated under IFRS?

They are deducted from the carrying amount of the bond liability and amortized using the effective interest method.

What is the difference between ASPE and IFRS regarding bond amortization?

IFRS requires the effective interest method, while ASPE may allow the straight-line method under certain conditions.

What is the impact of a sinking fund on bond reporting?

It represents assets set aside to meet future debt obligations, often reported as restricted assets.

What are mortgage bonds?

Bonds secured by a claim on real estate.

What are collateral trust bonds?

Bonds secured by stocks and bonds of other corporations.

What is the accounting treatment for accrued interest at the time of bond issuance?

The issuer collects the accrued interest from the investor and pays it back on the next interest payment date.

When is a bond considered to be issued at a discount?

When the stated interest rate is lower than the market interest rate.

When is a bond considered to be issued at a premium?

When the stated interest rate is higher than the market interest rate.

What is the purpose of an amortization schedule?

To track the periodic interest expense, cash interest paid, and the change in the bond's carrying value over its life.

How is the cash interest payment calculated?

Face value of the bond multiplied by the stated interest rate.

What is the journal entry to record the payment of interest on a bond issued at a discount?

Debit Interest Expense, Credit Discount on Bonds Payable, Credit Cash.

What is the journal entry to record the payment of interest on a bond issued at a premium?

Debit Interest Expense, Debit Premium on Bonds Payable, Credit Cash.

What is the effect of bond redemption on the balance sheet?

It removes the bond liability and any associated unamortized premium or discount from the books.

What does 'callable' mean in the context of bonds?

The issuer has the right to redeem the bonds at a specified price before the maturity date.

What is the journal entry for issuing bonds at par value?

Debit Cash, Credit Bonds Payable.

What is the journal entry for the payment of interest on bonds issued at par?

Debit Interest Expense, Credit Cash.

What is the journal entry for the accrual of interest on bonds?

Debit Interest Expense, Credit Interest Payable.

How is the carrying amount of a bond calculated when issued at a discount?

The carrying amount is the face value minus the unamortized discount.

How is the carrying amount of a bond calculated when issued at a premium?

The carrying amount is the face value plus the unamortized premium.

What is the effect of bond discount amortization on interest expense?

It increases interest expense.

What is the effect of bond premium amortization on interest expense?

It decreases interest expense.

What does a decreasing debt to assets ratio indicate about a company's solvency?

It indicates that the company's solvency has improved.

What does an increasing current ratio indicate about a company's liquidity?

It indicates that the company's liquidity has improved.

How is a gain or loss on the redemption of bonds calculated?

The difference between the reacquisition price and the carrying amount of the bonds.

What is the accounting treatment for bond redemption if the reacquisition price is less than the carrying amount?

A gain on redemption is recorded.

What is the accounting treatment for bond redemption if the reacquisition price is greater than the carrying amount?

A loss on redemption is recorded.

Under ASPE, what are the two methods allowed for bond amortization?

The effective interest method and the straight-line method.

Why might a company prefer the straight-line method of bond amortization?

Due to its simplicity.

What does the effective interest method use to calculate interest expense?

The carrying amount of the bonds multiplied by the effective interest rate.

What is the journal entry to record the payment of accrued interest?

Debit Interest Payable, Credit Cash.

What happens to the carrying amount of a bond issued at a discount over time?

It increases toward the face value as the discount is amortized.

What happens to the carrying amount of a bond issued at a premium over time?

It decreases toward the face value as the premium is amortized.

What is the reacquisition price of a bond?

The amount paid to retire the bond before its maturity date.

How is the interest expense calculated for a period using the effective interest method?

Carrying amount at the beginning of the period multiplied by the market rate of interest.

What is the cash paid for interest on bonds based on?

The face value of the bonds multiplied by the stated interest rate.

What is the difference between the cash paid for interest and the interest expense called?

The discount or premium amortized for the period.

What does the carrying amount of a bond represent?

The net amount at which the bond is reported on the balance sheet.

What is the primary purpose of calculating the debt to assets ratio?

To evaluate a company's long-term solvency.

What is the primary purpose of calculating the current ratio?

To evaluate a company's short-term liquidity.

How should a note or bond be recognized upon issuance?

It should be recognized at fair value adjusted by any directly attributable issue costs.

What is the formula for calculating the net amount of cash received from bond issuance?

Selling price of the bonds plus accrued interest, minus bond issuance costs.

What are the two methods for amortizing bond discounts or premiums?

The effective-interest method and the straight-line method.

Which method of bond amortization is required under IFRS?

The effective-interest method.

Why might a company choose the straight-line method for bond amortization?

It is valued for its simplicity.

How is the loss or gain on the redemption of bonds calculated?

The difference between the reacquisition price and the net carrying amount of the bonds redeemed.

What happens to the carrying amount of a bond when a discount is amortized?

The carrying amount increases over time until it equals the face value at maturity.

What happens to the carrying amount of a bond when a premium is amortized?

The carrying amount decreases over time until it equals the face value at maturity.

How is interest expense calculated under the effective-interest method?

By multiplying the carrying amount of the bonds at the beginning of the period by the effective interest rate.

What is the journal entry to record the issuance of bonds at a discount?

Debit Cash, Credit Bonds Payable.

What is the journal entry to record interest expense under the effective-interest method for a discount bond?

Debit Interest Expense, Credit Bonds Payable, Credit Cash.

What is the journal entry to record interest expense under the effective-interest method for a premium bond?

Debit Interest Expense, Debit Bonds Payable, Credit Cash.

How do you calculate the present value of a bond?

The sum of the present value of the principal amount and the present value of the periodic interest payments (annuity).

What does the 'N' represent in a financial calculator for bond valuation?

The total number of interest payment periods until maturity.

What does the 'I' represent in a financial calculator for bond valuation?

The market interest rate per period (yield).

What does the 'PMT' represent in a financial calculator for bond valuation?

The periodic cash interest payment.

What does the 'FV' represent in a financial calculator for bond valuation?

The face value (principal) of the bond to be paid at maturity.

When bonds are sold at a yield higher than the coupon rate, are they sold at a discount or premium?

They are sold at a discount.

When bonds are sold at a yield lower than the coupon rate, are they sold at a discount or premium?

They are sold at a premium.

How is accrued interest calculated for bonds issued between interest dates?

Face value multiplied by the coupon rate multiplied by the fraction of the year elapsed since the last interest date.

What is the effect of bond issuance costs on the initial carrying amount of the bond?

They reduce the initial carrying amount of the bond.

How is the gain on redemption of bonds recorded in the journal?

Debit Bonds Payable, Debit Interest Payable (if applicable), Credit Gain on Redemption, Credit Cash.

How is the loss on redemption of bonds recorded in the journal?

Debit Bonds Payable, Debit Loss on Redemption, Credit Cash.

What is the carrying amount of a bond?

The face value of the bond plus any unamortized premium or minus any unamortized discount.

If a bond is redeemed, what happens to the unamortized discount or premium associated with those specific bonds?

It must be written off as part of the calculation of the gain or loss on redemption.

Under the effective-interest method, does the interest expense remain constant each period?

No, it changes each period based on the changing carrying amount of the bond.