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Questions and Answers
What is a bond payable?
What is a bond payable?
- A contract between two parties to exchange goods and services
- A document that represents the ownership of an entity
- A certificate that represents the indebtedness of an entity (correct)
- A type of investment in stocks
What is the bond indenture?
What is the bond indenture?
- A contract between the issuer and investor that specifies the terms and arrangements of the bond contract (correct)
- A type of investment in stocks
- A type of bond that has a priority in payments
- A certificate that represents the ownership of an entity
What is a Serial Bond?
What is a Serial Bond?
- A bond that is payable on a periodical basis (correct)
- A bond that has no payment of principal since there is no maturity date
- A bond that is payable lump-sum on maturity date
- A bond that is secured by a mortgage or lien against real estate
What is a Debenture Bond?
What is a Debenture Bond?
What is a Subordinate Bond?
What is a Subordinate Bond?
What is a Perpetual Bond?
What is a Perpetual Bond?
What is the normal balance of a discount on bonds payable?
What is the normal balance of a discount on bonds payable?
When the market rate of interest is higher than the bond rate, what happens to the carrying amount of the bonds?
When the market rate of interest is higher than the bond rate, what happens to the carrying amount of the bonds?
What is the purpose of amortizing the discount or premium on bonds payable?
What is the purpose of amortizing the discount or premium on bonds payable?
What type of bond gives the bondholder the option to convert the bond into equity securities?
What type of bond gives the bondholder the option to convert the bond into equity securities?
What is the effective interest method used for?
What is the effective interest method used for?
What is the default initial measurement of bonds payable?
What is the default initial measurement of bonds payable?
How often is the interest payable on the bonds issued by Nitrogen Corp.?
How often is the interest payable on the bonds issued by Nitrogen Corp.?
What is the effect on the fair value when the stated rate is less than the discount rate?
What is the effect on the fair value when the stated rate is less than the discount rate?
What is the market rate of interest on January 1, 2023, for the bonds issued by Nitrogen Corp.?
What is the market rate of interest on January 1, 2023, for the bonds issued by Nitrogen Corp.?
What is the carrying amount of a bond when the fair value is less than the face amount?
What is the carrying amount of a bond when the fair value is less than the face amount?
What is the purpose of determining the present value of all principal and interest payments?
What is the purpose of determining the present value of all principal and interest payments?
What type of bond does not have a coupon or stated rate and only pays the principal amount on the maturity date?
What type of bond does not have a coupon or stated rate and only pays the principal amount on the maturity date?
What are the costs incurred in connection with the issuance of bonds payable?
What are the costs incurred in connection with the issuance of bonds payable?
How do bond issue costs affect the initial recognition of bonds payable?
How do bond issue costs affect the initial recognition of bonds payable?
Why is a new effective interest rate determined after considering bond issue costs?
Why is a new effective interest rate determined after considering bond issue costs?
What is the amount of proceeds received by Manganese Company from the bond issuance?
What is the amount of proceeds received by Manganese Company from the bond issuance?
What is the amount of bond issue costs incurred by Manganese Company?
What is the amount of bond issue costs incurred by Manganese Company?
What is the effective interest rate of Manganese Company's bonds after considering bond issue costs?
What is the effective interest rate of Manganese Company's bonds after considering bond issue costs?
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
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Description
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.
