24 Questions
What is a bond payable?
A certificate that represents the indebtedness of an entity
What is the bond indenture?
A contract between the issuer and investor that specifies the terms and arrangements of the bond contract
What is a Serial Bond?
A bond that is payable on a periodical basis
What is a Debenture Bond?
A bond that has no security or collateral
What is a Subordinate Bond?
A bond that will be paid only when all other liabilities have been fully paid
What is a Perpetual Bond?
A bond that has no payment of principal since there is no maturity date
What is the normal balance of a discount on bonds payable?
Debit
When the market rate of interest is higher than the bond rate, what happens to the carrying amount of the bonds?
It decreases
What is the purpose of amortizing the discount or premium on bonds payable?
To make the face value equal to the carrying amount at maturity
What type of bond gives the bondholder the option to convert the bond into equity securities?
Convertible Bond
What is the effective interest method used for?
To amortize the discount or premium
What is the default initial measurement of bonds payable?
Face value less transaction costs
How often is the interest payable on the bonds issued by Nitrogen Corp.?
Semi-annually
What is the effect on the fair value when the stated rate is less than the discount rate?
Fair value is less than face amount (discount)
What is the market rate of interest on January 1, 2023, for the bonds issued by Nitrogen Corp.?
18%
What is the carrying amount of a bond when the fair value is less than the face amount?
Face amount less unamortized discount
What is the purpose of determining the present value of all principal and interest payments?
To determine the fair value on initial recognition
What type of bond does not have a coupon or stated rate and only pays the principal amount on the maturity date?
Zero-Coupon Bond
What are the costs incurred in connection with the issuance of bonds payable?
Underwriting costs, printing costs, legal costs, and registration costs
How do bond issue costs affect the initial recognition of bonds payable?
They decrease the fair value of the bonds
Why is a new effective interest rate determined after considering bond issue costs?
Because the bond issue costs decrease the fair value of the bonds
What is the amount of proceeds received by Manganese Company from the bond issuance?
P5,853,375
What is the amount of bond issue costs incurred by Manganese Company?
P141,596
What is the effective interest rate of Manganese Company's bonds after considering bond issue costs?
12%
Study Notes
Bonds Payable
- A certificate representing the indebtedness of an entity, requiring the issuer to pay a specified sum of money at a specified future date and make periodic interest payments at a stated rate until the principal sum is paid.
Characteristics of Bonds
- Classification of bonds:
- As to payment of principal amounts:
- Term Bonds (lump-sum payment on maturity date)
- Serial Bonds (periodic payment)
- Perpetual Bonds (no payment of principal, no maturity date)
- As to seniority:
- Senior Bonds (priority in payments above other liabilities)
- Subordinate Bonds (payment only after all other liabilities are fully paid)
- As to security or collateral:
- Debenture Bonds (no security or collateral)
- Mortgage Bonds (secured by real estate or movable properties)
- Collateral Bonds (secured by shares and bonds of other entities)
- As to payment of principal amounts:
Initial Measurement of Bonds Payable
- Measured at fair value less transaction costs
- Determined by:
- Given (explicit) value
- Quoted price (active market quotation)
- Present value of all principal and interest payments
- Effect of discount or premium on initial recognition:
- Fair Value = Face Amount (no discount or premium)
- Fair Value < Face Amount (discount)
- Fair Value > Face Amount (premium)
Subsequent Measurement of Bonds Payable
- Measured at amortized cost
- Discount or premium is amortized over the maturity date using the effective interest method
- Goal: Face Amount = Carrying Amount at maturity date
Bond Issue Costs
- Fees and costs incurred in connection with the issuance of bonds payable (transaction costs)
- Decrease the amount of fair value or net proceeds that the issuer receives from the bonds
- Affect the effective interest rate used in subsequent measurements
Understand the concept of bonds payable from the issuer's point of view, including the contract between the issuer and investor, and the obligations of the issuer to make periodic interest payments and repay the principal sum.
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