Debt Basics
What document sets out a bond's coupon rate, payment dates, maturity and call privileges?
The bond indenture
A bond has a 6% coupon when the market rate is 8%. Does it sell at a premium, par or a discount?
Discount
What is the formula for interest expense each period?
Opening carrying amount x periodic market rate
What is the journal entry when a bond is repaid at maturity?
Dr. Bonds payable; Cr. Cash
Under IFRS 9, how is long-term debt measured initially, and how is it measured afterwards?
Initially at fair value (PV of future cash flows), then at amortized cost using the effective interest method
Pismo's $50,000 bonds carry a 12% coupon and a 16% yield, paid quarterly. What is the cash coupon each quarter, and what rate do you discount at?
$1,500 and 4%
For a discount bond, which account is debited and which two are credited on an interest date?
Dr. Interest expense; Cr. Cash; Cr. Discount on bonds payable
What is it called when a company pays a trustee, who then handles payments to investors, so the debt is derecognized?
Defeasance
A company issues bonds for $98,000 and pays $2,000 in legal and underwriting fees. What is the initial carrying amount, and does the effective interest rate go up or down?
$96,000, and the effective rate goes up
A 5-year bond pays interest quarterly (20 payments in total). It is dated Oct 31, 20X3, but isn't sold until Aug 1, 20X4, after 3 payment dates have already passed. How many periods do you discount over, and do you use the market rate from the bond date or the sale date?
17 periods (20 − 3), using the market rate on the sale date (Aug 1, 20X4)17 periods, at the market rate on the actual sale date
Carrying amount is $90,000 on a $100,000 bond with an 8% coupon and 10% market rate, paid semi-annually. What are the interest expense, cash paid and amortization?
$4,500, $4,000 and $500 (new carrying amount $90,500)
A company retires bonds early by buying them back on the open market. The bonds have a face value of $20,000 and are recorded on the books at $19,200. The company pays 98 (98% of face value). Does it record a gain or a loss, and how much?
Loss of $400. Cash paid = $20,000 × 98% = $19,600, which is $400 more than the $19,200 carrying amount.