Bonds Payable Quiz: Issuer's Perspective Questions and Answers

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Questions and Answers

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?

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?

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?

A bond that has no security or collateral Signup and view all the answers

What is a Subordinate Bond?

A bond that will be paid only when all other liabilities have been fully paid Signup and view all the answers

What is a Perpetual Bond?

A bond that has no payment of principal since there is no maturity date Signup and view all the answers

What is the normal balance of a discount on bonds payable?

Debit Signup and view all the answers

When the market rate of interest is higher than the bond rate, what happens to the carrying amount of the bonds?

It decreases Signup and view all the answers

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 Signup and view all the answers

What type of bond gives the bondholder the option to convert the bond into equity securities?

Convertible Bond Signup and view all the answers

What is the effective interest method used for?

To amortize the discount or premium Signup and view all the answers

What is the default initial measurement of bonds payable?

Face value less transaction costs Signup and view all the answers

How often is the interest payable on the bonds issued by Nitrogen Corp.?

Semi-annually Signup and view all the answers

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) Signup and view all the answers

What is the market rate of interest on January 1, 2023, for the bonds issued by Nitrogen Corp.?

18% Signup and view all the answers

What is the carrying amount of a bond when the fair value is less than the face amount?

Face amount less unamortized discount Signup and view all the answers

What is the purpose of determining the present value of all principal and interest payments?

To determine the fair value on initial recognition Signup and view all the answers

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 Signup and view all the answers

What are the costs incurred in connection with the issuance of bonds payable?

Underwriting costs, printing costs, legal costs, and registration costs Signup and view all the answers

How do bond issue costs affect the initial recognition of bonds payable?

They decrease the fair value of the bonds Signup and view all the answers

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 Signup and view all the answers

What is the amount of proceeds received by Manganese Company from the bond issuance?

P5,853,375 Signup and view all the answers

What is the amount of bond issue costs incurred by Manganese Company?

P141,596 Signup and view all the answers

What is the effective interest rate of Manganese Company's bonds after considering bond issue costs?

12% Signup and view all the answers

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)

Initial Measurement of Bonds Payable

Measured at fair value less transaction costs
Determined by:
1. Given (explicit) value
2. Quoted price (active market quotation)
3. 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.

Bonds Payable: Issuer's Perspective