Bonds Payable Characteristics and Measurement Quiz

Types of Bonds

• A convertible bond can be exchanged for the shares of the issuing entity.
• A callable bond can be called in before its maturity.
• A guaranteed bond has another party that promises to pay if the borrower fails to do so.

Measurement of Bonds Payable

• Initially, bonds payable not designated at fair value are measured at fair value less transaction costs.
• If designated at fair value through profit or loss, transaction costs are treated as an expense immediately.
• The fair value of bonds payable is the present value of the future cash payment to settle the bond liability.

Subsequent Measurement

• After initial recognition, bonds payable are measured either at amortized cost using the effective interest method or at fair value through profit or loss.

Bond Issuances

• There are two approaches to accounting for authorization and issuance of bonds: Memorandum Approach and Journal Entry Approach.
• The Memorandum Approach does not require an entry upon authorization, whereas the Journal Entry Approach records authorized bonds payable.

Bond Pricing

• The difference between the bond's face value and present value is either a discount or a premium.
• A bond issued at a premium results in a gain for the issuing entity, while a bond issued at a discount results in a loss.

Callable Bonds

• If bonds are callable, the issuer has the option to repurchase the bonds earlier.
• Once bonds are retired, the issuer eliminates the bond payable liability on its books.

Treasury Bonds

• Treasury bonds are an entity's originally issued and reacquired but not canceled bonds.
• The acquisition of treasury bonds follows the same accounting procedures as a formal retirement of bonds before the maturity date.
• The difference between the acquisition cost and the carrying amount of the treasury bonds is treated as a gain or loss on the acquisition of treasury bonds.