Bonds Payable Overview

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Questions and Answers

What is the primary role of the bondholder in a bond agreement?

To lend a fixed amount to the issuer (correct)

To pay interest to the issuer

To convert the bond at maturity

To redeem the bond before the maturity date

Which term refers to the amount that must be paid back to bondholders at maturity?

Interest payment

Principal value (correct)

Maturity date

Coupon rate

What is indicated by the coupon rate of a bond?

The duration between interest payments

The date the issuer must repay the bond

The interest rate the issuer will pay the bondholder (correct)

The total amount to be paid at maturity

Which type of obligation do bonds payable represent?

Liabilities to multiple lenders Signup and view all the answers

How often are interest payments typically made on bonds?

Generally twice a year Signup and view all the answers

What is the maturity date of a bond?

The date when the issuer must pay back the principal amount Signup and view all the answers

What is typically included in the definitions of bonds payable?

Formal arrangements between issuers and multiple bondholders Signup and view all the answers

Which of the following is NOT a basic characteristic of a bond?

Issuance at a discount only Signup and view all the answers

What is the issue price of the bonds issued by UVW Corp. on January 2, 2020?

$957,349 Signup and view all the answers

What is the market interest rate for the bonds issued by UVW Corp. on January 2, 2020?

6 Signup and view all the answers

How much is the interest payment made at the end of the first period?

$25,000 Signup and view all the answers

What is the calculated interest expense at the end of period one?

$28,720 Signup and view all the answers

What is the amount of amortization for the bond discount at the end of the first period?

$3,720 Signup and view all the answers

For the bonds issued at a premium, what is the issue price when the market interest rate is 4%?

$1,044,913 Signup and view all the answers

What is the stated rate of the bonds issued by UVW Corp.?

5 Signup and view all the answers

What financial impact do bonds issued at a discount have compared to bonds issued at par?

Higher interest expense over the life of the bond Signup and view all the answers

What is the correct entry to record the first semiannual interest payment for bonds sold on July 15 by Manitoba Hydro?

Debit Interest Payable $5,000, Credit Cash $5,000 Signup and view all the answers

When bonds are issued at a discount, what is the relationship between the carrying value and the face value of the bonds?

Carrying value is less than face value Signup and view all the answers

What is the correct accounting treatment for a premium on bonds payable?

It is added to the bonds payable Signup and view all the answers

What method is used to allocate a bond discount or premium over the bond's life?

Straight-line amortization method Signup and view all the answers

If UVW Corporation issues bonds at 98%, what is the dollar amount of the discount on a $1 million bond issue?

$20,000 Signup and view all the answers

How much is the semiannual amortization of a $20,000 bond discount if there are 20 periods?

$1,000 Signup and view all the answers

What entry is made when UVW Corporation issues its 6%, 10-year bonds priced at 103.81?

Debit Cash $1,038,100, Credit Bonds Payable $1,000,000, Credit Premium on Bonds Payable $38,100 Signup and view all the answers

Which of the following is NOT true regarding the amortization of bond premiums?

It increases the interest expense over time Signup and view all the answers

What is a primary characteristic of an operating lease?

The lessor retains usual risks and rewards of ownership. Signup and view all the answers

Which condition would classify a lease as a capital lease for the lessee?

There is reasonable assurance that the lessee will obtain ownership. Signup and view all the answers

How should lease commitments of an operating lease be reported in financial statements?

They should be stated in the notes to the financial statements. Signup and view all the answers

What is one characteristic that could indicate a lease is a capital lease from the lessor's perspective?

Normal credit risk associated with the lease. Signup and view all the answers

Which of the following statements is true regarding capital leases?

They transfer substantial risks to the lessee. Signup and view all the answers

What is a financial implication for the lessee under an operating lease?

The lessee's reports reflect an expense without asset recognition. Signup and view all the answers

When does a capital lease arise according to the conditions specified?

When at least one condition regarding risks, term, or recovery is met. Signup and view all the answers

What differentiates capital leases from operating leases regarding financial reporting?

Capital leases require recognition of both the asset and liability. Signup and view all the answers

What is included in the cost of the leased asset for the lessee?

The present value of future lease payments and any initial payment Signup and view all the answers

How is a capital lease recorded in the lessee's financial statements?

By debiting the asset and crediting a liability account Signup and view all the answers

What is the interest treatment for lease payments in a capital lease?

Interest must be accrued over the term of the lease Signup and view all the answers

In the Sierra Wireless example, what is the total value of the building recorded in the capital lease?

$20,000 plus $167,298 Signup and view all the answers

What is the term of the lease for Sierra Wireless?

20 years Signup and view all the answers

How often are lease payments made in the example of Sierra Wireless?

Annually Signup and view all the answers

What happens to the leased asset over the term of the capital lease?

It must be amortized over the lease term Signup and view all the answers

What type of accounting treatment does a capital lease involve for the lessee?

It is recorded as a purchase similar to an asset purchase Signup and view all the answers

Study Notes

Bonds Payable

Bonds are formalized agreements between a borrower (issuer) and a lender (bondholder)
The bondholder lends a set amount at a fixed interest rate for a fixed term (maturity date)
Bonds Payable are a group of debt instruments issued to multiple lenders or bondholders
Key elements of a bond include the:
- Principal value (face value, maturity value, par value) - the amount the borrower repays at maturity
- Maturity date - the date the principal is due
- Coupon rate - the interest rate paid to the bondholder, usually paid semi-annually

Types of Bonds

Debentures - bonds backed solely by the general credit of the issuing company
Mortgage bonds - bonds secured by a lien on specific assets of the issuer
Convertible bonds - bonds that can be converted into shares of common stock of the issuing corporation
Callable bonds - bonds that can be redeemed by the issuer before the maturity date
Zero-coupon bonds - bonds issued at a discount that do not pay interest
Income bonds - bonds that only pay interest when the issuer has sufficient income to pay its interest obligations

Issuing Bonds

Bonds can be issued at par value (face value)
Bonds can be issued at a discount - when the market interest rate is higher than the coupon rate
Bonds can be issued at a premium - when the market interest rate is lower than the coupon rate
When bonds are issued at a discount or premium, the difference is amortized (allocated) over the life of the bond

Amortizing Bond Discounts and Premiums

Straight-line amortization - a method of spreading the discount or premium over the life of the bond evenly
Effective-interest method - a method of amortizing the discount or premium based on the effective interest rate (market rate)

Accounting for Lease Liabilities

Leases - agreements where an asset user (lessee) pays a property owner (lessor) for use of the asset
Accountants classify leases into two categories:
- Operating leases - short-term or cancellable leases. Lessee has no continuing right to the asset. Lessor retains risks and rewards of ownership.
- Capital leases - leases that meet certain criteria and transfer ownership, or a significant portion of the risks and rewards, to the lessee.

Capital Leases

Capital lease criteria for the lessee:
- The lessee is reasonably assured of ownership at the end of the lease term
- The lease term covers at least 75% of the asset's useful life
- The lessor will recover the original investment plus a return
Capital lease criteria for the lessor:
- Same criteria as the lessee
- The credit risk is normal
- Unreimbursable costs can be estimated
When a lease meets these criteria, it is a capital lease
The lessee records the leased asset at the present value of the lease liability

International Financial Reporting Standards (IFRS)

IFRS requires companies to classify leases as either operating leases or finance leases
IFRS uses a similar definition of a finance lease to the capital lease under U.S. GAAP

Key Points

Bonds payable are a significant source of long-term financing for companies
Understanding bond issuance, pricing, and amortization is crucial for financial statement analysis
Leases are another important source of financing, and their classification can impact financial reporting
IFRS has harmonized some of the accounting rules for long-term liabilities, but differences still exist

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Description

This quiz explores the fundamentals of bonds payable, including key elements such as principal value, maturity date, and coupon rate. Learn about different types of bonds such as debentures, mortgage bonds, and convertible bonds. Test your knowledge and understanding of these essential financial instruments.