Chapter 4- Bonds Payable
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What is a bond?
- A formal unconditional promise, made under a seal, to pay a specificed sum of money at a determinable future date, and to make periodic interest payments at a stated rate until the principal sum is paid.
- A contract of debt whereby one party called the borrower or issuer borrows funds from another party called the investor or bondholder
What is a bond indenture or deed of trust?
A document w/c shows in detail the terms of the bond and the rights and duties of the borrower and other parties to the contract
These are bonds with a single date of maturity.
These are bonds with a series of maturity dates or bonds that mature by installments.
These are bonds secured by mortgage of real properties.
These are bonds secured by investemnts in stocks and bonds.
These are bonds without collateral security.
These bonds require the registration of the name of the bondholder on the boooks of the corporation.
These are bonds in w/c the name of the bondholder is not registered. Accordingly, interset is paid periodically to bearer of the bonds or the person submitting a detachable interest coupon.
Coupon or bearer bonds.
These are bonds that can be exchanged for equity shares of the issuing entity.
These are bonds that can be called in for payment before the date of maturity.
These are bonds issued whereby another party promises to make payment if the borrower fails to do so.
These are high risk and high yield bonds issued by entities that are heavily indebted or otherwise weak financial position.
These are bonds w/c are redeemable in terms of commodities such as oil or precious metals.
Explain a premium on bonds payable.
- Sales price > Face value
- gain: issuing entity or borrower because it receives more than what is obligated to pay under the bond issue
- obligation of the borrower is limited only to the face value of the bonds
- DR:Premium on bonds payable
- CR:Interest Expense
Explain a discount on bonds payable.
- Sales price < Face value
- loss: issuing entity or borrower bec. it receives less than what is obligated to pay (face value)
- DR:Interest Expense
- CR:Discount on bonds payable
These are incremental costs that are directly attributable to the issue of bonds payable
Bonds issue costs or transaction costs
Give examples of BIC
- printing and engraving cost
- legal and accounting fee
- registration fee w/ regulatory authorities
- commission paid to agents and underwriters
- other similar charges
What is the treatment for BIC?
amortized over the life of the bond issue in a amanner similar to that used for discount onm bonds payable
Explain the measurement of bonds payable
- After initial recognition, BP shall be measured at amortized cost using EIM
- discount on BP and BIC=deduction from BP
- premium on BP=addition to BP
These are an entity's own bonds originally issued and reacquired but not canceled.
It is the floating of new bonds payablethe proceeds from w/c are used in paying the original bonds payable.
It is the premature retirement of the old bonds payable through the issuance of new bonds payable.
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