- Information
- AI Chat
Module 1 2 Bonds Payable
Engineering (2001)
Sveučilište u Zagrebu
Preview text
MODULE 1- 2 Bonds Payable
LEARNING OBJECTIVES: 1. Identify various types of bond issues. 2. Describe the accounting valuation for bonds at date of issuance. 3. Apply the methods of bond discount and premium amortization.
OVERVIEW Bonds are debt instruments issued by bond issuers to bond holders. A bond is a debt security under which the bond issuer owes the bond holder a debt including interest or coupon payments and or a future repayment of the principal on the maturity date. Variations exist in bond types, payment terms, and features.
Interest on bonds, or coupon payments, are normally payable in fixed intervals, such as semi- annually, annually, or monthly. Ownership of bonds are often negotiable and transferable to secondary markets. Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure.
Bonds and stocks are both securities, but the major difference between the two is that stockholders have an equity stake in the company, whereas bondholders have a creditor stake in the company. Another difference is that bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks may be outstanding indefinitely.
Acquiring new knowledge Asynchronous - links to more information: farhatlectures; ifrsbox
Bonds payable are financial instruments representing a company’s commitment to pay back a specified sum to the owner of the instrument in a specified time together with periodic interest payments over the life of the bond.
Bond contract known as a bond indenture. Represents a promise to pay: 1. sum of money at designated maturity date, plus 2. periodic interest at a specified rate on the maturity amount (face value).
There are two significant advantages for a corporation to issue bonds instead of common stock: 1. Bonds will not dilute the ownership interest of the stockholders, and 2. Bonds have a lower cost than common stock.
Bonds have a lower cost than common stock because of the bond's formal contract to pay the interest and principal payments to the bondholders and to adhere to other conditions. A second reason for bonds having a lower cost is that the bond interest paid by the issuing corporation is deductible on its income tax return, whereas dividends are not tax deductible.
Types of Bonds Payable There are many different types of bond with different characteristics, the list below shows a few of the types available. Secured bond payable – Secured on specific assets of the business such as property or equipment.
Registered bonds payable – Registered to a particular owner
Bearer bonds – The owner is the bearer (person who has) the bond.
Sinking fund bonds payable – Regular amounts have to be transferred into an account (sinking fund) to repay the bond at maturity.
Serial bonds payable – Issued in groups with differing maturity dates.
Convertible bonds payable – A convertible bond is in effect a normal bond with a call option attached, the owner receives an interest payment (coupon payment) until maturity, and then has the option to convert the bond into shares in the business at a pre-agreed rate.
Due to the call option, a convertible bond tends to have a lower interest rate than a normal bond, thereby reducing interest payments for the issuing business. However, due to its hybrid nature (part equity, part debt), a convertible bond ranks lower than a traditional bond in the event of bankruptcy, and investors who buy convertible bonds therefore have less security and higher risk. The upside to the investor is the potential for gain on conversion of the call option. A convertible bond is sometimes referred to as a convertible note, convertible debenture, or convertible securities.
Callable bond payable – Can be called in by the business and bought back before the maturity date.
Puttable bonds payable – A puttable bond is effectively the opposite of a callable bond in that it gives the bondholder the right to decide whether to sell it back early or keep it until it matures.
Debenture bonds payable – Not secured on specific assets of the business.
Measurement Debt securities shall be measured at amortized cost or fair value.
Selling price of a bond issue is set by the supply and demand of buyers and sellers, relative risk, market conditions, and state of the economy.
Investment community values a bond at the present value of its expected future cash flows, which consist of (1) interest and (2) principal.
Interest Rate
Stated , coupon , or nominal rate = Rate written in the terms of the bond indenture. Bond issuer sets this rate. Stated as a percentage of bond face value (par).
MODULE # 1-2 Post test PRACTICAL ACCOUNTING 1 – REVIEW BONDS PAYABLE PROF. U. VALLADOLID
Multiple Choice Identify the choice that best completes the statement or answers the question.
On April 1, 2021, JP Company issued at 99 plus accrued interest, 2,000 of its 8% P1,000 face value bonds. The bonds are dated January 1, 2021, mature on January 1, 2031, and pay interest on July 1 and January 1. JP paid bond issue cost of P70,000. From the bond issuance, JP received net cash of a. 2,020,000 b. 1,980,000 c. 1,950,000 d. 1,910,
On January 31, 2021, Joseph Company issued 3,000,000 maturity value, 12% bonds for P3,000,000 cash. The bonds are dated December 31, 2020 and mature on December 31,
- Interest will be paid semiannually on June 30 and December 31. What amount of accrued interest payable should Joseph report in its September 30, 2021, balance sheet? a. 270,000 b. 240,000 c. 180,000 d. 90,
On June 30, 2021, Joseph Company issued at 99, five thousand of its 8%, P1,000 face value bonds. The bonds were issued through an underwriter to whom Joseph paid bond issue cost of P425,000. On June 30, 2021, Joseph should report the bond liability at a. 4,525,000 b. 4,950,000 c. 5,000,000 d. 4,575,
On January 1, 2021, Joseph Company issued its 10% bonds in the face amount of 1,000, that mature on January 1, 2031. The bonds were issued for 886,000 to yield 12%, resulting in bond discount of P114,000. Joseph uses the interest method of amortizing bond discount. Interest is payable July and January 1. For the year ended December 31, 2021, Joseph should report bond interest expense at a. 436,000 b. 440,000 c. 432,000 d. 120,000 e. 106,
On January 1, 2021, Jerome Company issued its 10% bonds in the face amount of P5,000,000, which mature on January 1, 2031. The bonds were issued for P5,675,000 to yield 8%, resulting in bond premium of P675,000. Jerome uses the interest method of amortizing bond premium. Interest is payable annually on December 31. At December 31, 2021, Jerome’s adjusted unamortized bond premium should be a. 675,000 b. 629,000 c. 607,500 d. 507,
On December 31, 2021, Joshtin Company issued 5,000 of its 8%, 10-year, 1,000 face value bonds with detachable stock warrants at 110. Each bond carried a detachable warrant for one share of Joshtin’s common stock at a specified option price of P25 per share. Immediately after issuance, the market value of the bonds without the warrants was 5,400,000 and the market value of the warrants was 600,000. In its December 31, 2021 balance sheet, what amount should Joshtin report as bonds payable? a. 5,000,000 b. 4,950,000 c. 4,900,000 d. 5,400,
On December 31, 2021, Joshtin Company issued 5,000,000 face value, 5-year bonds at 109. Each 1,000 bond was issued with 50 detachable stock warrants, each of which entitled the bondholder to purchase one share of 5 par value common at 25. Immediately after issuance, the market value of each warrant was 5. The stated interest rate on the bonds is 11% payable annually every December 31. However, the prevailing market rate of interest for similar bonds without warrants is 12%. The present value of 1 at 12% for 5 periods is 0 and the present value of an ordinary annuity of 1 at 12% for 5 periods is 3. On December 31, 2021, what amount should Joshtin record as discount or premium on bonds payable? a. 170,000 discount b. 450,000 premium c. 450,000 discount d. 800,000 premium
On January 1, year 2, Southern Corporation received 107,720 for a 100,000 face amount, 12% bond, a price that yields 10%. The bonds pay interest semiannually. Southern elects the fair value option for valuing its financial liabilities. On December 31, year 2, the fair value of the bond is determined to be 106,460. Southern recognized interest expense of 12,000 in its year 2 income statement. What was the gain or loss recognized on the year 2 income statement to report this bond at fair value? a. 1,260 gain b. 6,460 gain c. 12,000 loss d. 13,260 loss
Cadbury Company's 10 year, 8% 10,000,000 face value of bonds have a carrying value of 9,672,300 on December 31, 2020. The bonds pay interest semiannually at 8% on June 30 and December 31. On January 1, 2021, the bonds are called at 102. What loss would be reported for the called bonds on the company's 2021 income statement? a. 102,000 loss b. 200,000 loss c. 327,700 loss d. 527,700 loss
On December 1, 2018, the Lawrz Corporation issued five-year, non-convertible 5,000,000 face value 12% bonds for 5,386,072, a price that yields 10%. Interest is payable semi-annually on June 1 and December 1. On August 1, 2021, the Emerald Corporation retired 3,000,000 of the bonds at 105 plus interest. The Accounting period for the Lawrz Corporation is the calendar year.
What is the carrying value of the bonds on December 31, 2019? a. 5,306,515 b. 5,309,000 c. 5,309,010 d. 5,317,
What is the carrying value of the bonds retired on August 1, 2021? a. 3,125,172 b. 3,127,008 c. 3,129,355 d. 3,200, e. 3,122,
What is the gain or loss on redemption of the bonds on August 1, 2021? a. 24,828 loss b. 24,848 loss c. 24,828 gain d. 24,848 gain e. 27,962 loss
The Conversion clause in the bond indenture entitled the bondholders to received 40 shares of 20 par value in exchange for each 1,000 bond.
On June 30, 2021, the holders of 5,000,000 face value bonds exercised the conversion privilege. The market price of the bonds on that date was 1,100 per bond in the market price of the share was 30.
The total unamortized bond discount at the date of conversion was 500,000. The share premium from conversion privilege has a balance of 2,000,000 on June 30, 2021.
What amount of share premium should be recognize by reason of the conversion of bonds payable into share capital? a. 2,000,000 b. 2,750,000 c. 3,000,000 d. 1,750,
- Clay Company had 600,000 convertible 8% bonds payable outstanding on June 30, 2021. Each 1,000 bond was convertible into 10 ordinary shares of 50 par value. On July 1, 2021, the interest was paid into bondholders, and the bonds were converted into ordinary shares, which had a fair value of 70 per share. The unamortized premium on these bonds was 12,000 at the date of conversion. No equity component was recognized when the bonds were originally issued.
What is the increased in the share capital and share premium, respectively, as a result of the bond conversion? a. 300,000 and 312, b. 306,000 and 306, c. 450,000 and 162, d. 600,000 and 12,
- On January 1, 2021, Ezekiel Company received 1,077,200 for 1,000,000 face amount 12% bonds. The bonds were sold to yield 10%. Interest is payable semiannually every January 1 and July 1. The entity has elected the fair value option for measuring the financial liability.
On December 31, 2021, the fair value of the bonds is determined to be 1, 064,600 due to market and interest factors.
What is the carrying amount of the bonds payable on January 1, 2021? a. 1,000,000 b. 1,077,200 c. 500,000 d. 538,
What is the interest expense for 2021? a. 120,000 b. 100,000 c. 107,000 d. 129,
What is the gain or loss from change in fair value of the bonds for 2021? a. 64,600 gain b. 64,600 loss c. 12,600 gain d. 12,600 loss
What is the carrying amount of the bonds payable on December 31, 2021? a. 1,064,600 b. 1,077,200 c. 1,000,000 d. 1,064,
Mae Jong Corp. issued 1,000 convertible bonds at the beginning of 2021. The bonds have a four-year term with a stated rate of interest of 6 percent, and are issued at par with a face value of 1,000 per bond (the total proceeds received from issuance of the bonds are 1,000,000). Interest is payable annually at December 31. Each bond is convertible into 250 ordinary shares with a par value of 1. The market rate of interest on similar non-convertible debt is 9 percent. Assume that at the issuance date, 97,187 was credited to Share Premium—Conversion Equity. The bonds were not converted at maturity and Mae Jong pays off the convertible debt holders. What amount will Mae Jong record as a gain or a loss on this transaction? a. -0- b. 97,187 c. 24,297 d. 250,
At December 31, 2020 the following balances were reported on the statement of financial position of Yang Corporation: Bonds Payable 1,472,000, Interest Payable 33,750, The bonds have a face amount of 1,500,000,000. If the bonds are retired on January 1, 2021 at 101, what amount of gain or loss will Yang report on the redemption? a. 15,000,000 b. 28,000,000 c. 43,000,000 d. 61,759,
On December 31, 2021, Cey Company had outstanding 10%, 1,000,000 face amount convertible bonds payable maturing on December 31, 2024. Interest is payable on June 30 and December 31. Each 1,000 bond is convertible into 50 shares of 10 par value. On December 31, 2021, the unamortized premium on bonds payable was 60,000.
On December 31, 2021, 400 bonds were converted when Cey’s share had a market price of 24. The entity incurred 4,000 in connection with the conversion. No equity component was recognized when the bonds were originally issued. What is the share premium from the issuance of shares as a result of the bond conversion on December 31, 2021? a. 176,000 b. 220,000 c. 276,000 d. 280,
On March 1, 2021, Joshtin Company issued 5,000,000 of 12% non-convertible bonds at 103 which are due on February 28, 2021. In addition, each P1,000 bond was issued with 30 detachable stock warrants, each of which entitled the bondholder to purchase, for 50, one share of Joshtin common stock, par value 25. On March 1, 2021, the quoted market value of each warrant was 4. the market value of the bonds ex-warrants at the time of issuance is 95. What amount of the proceeds from the bond issue should Joshtin record as an increase in stockholders’ equity? a. 600,000 b. 300,000 c. 200,000 d. 400,
On July 1, 2021 Salem Corporation issued 2,000,000 of 7% bonds payable in 10 years. The bonds pay interest semiannually. Each 1,000 bond includes a detachable stock purchase right. Each right gives the bondholder the option to purchase for 30, one share of 1 par value common stock at any time during the next 10 years. The bonds were sold for 2,000,000. The value of the stock purchase rights at the time of issuance was 100,000.
How many warrants were issued?
On December 31, 2021, the holders of the bonds with total face value of 2,000,000 exercised their conversion privilege. In addition, the company reacquired at 110, bonds with a face value of 1,000,000.
The balances in the capital accounts as of December 31, 2020 were:
Common stock, P100 par, authorized 100,000 shares, issued and outstanding, 60,000 shares P6,000, Premium on common stock 1,000,
Market value of the common stock and bonds were as follows:
Date Bonds Common stock December 31, 2020 118 40 December 31, 2021 110 42
Based on the above and the result of your audit, answer the following:
How much of the proceeds from the issuance of convertible bonds should be allocated to equity? a. 1,268,000 b. 253,632 c. 443,328 d. 0 e. 198,
How much is the carrying value of the bonds payable as of December 31, 2020? a. 4,000,000 b. 2,778,800 c. 3,592,340 d. 3,801,
How much is the interest expense for the year 2021? a. 320,000 b. 277,880 c. 359,234 d. 380,100 e. 386,
The entry to record the conversion on December 31, 2021 will include a credit to APIC of a. 730,553 b. 800,000 c. 615,786 d. 0 e. 863,10 6
How much is the loss on bond reacquisition on December 31, 2021? a. 100,000 b. 192,106 c. 134,724 d. 0 e. 118,19 5
Module 1 2 Bonds Payable
Course: Engineering (2001)
University: Sveučilište u Zagrebu
- Discover more from:
