USCPA (FAR) – (20) Bonds | かめかめ Blog

I would like to record about the key points of the US CPA exam content.

Debentures are unsecured bonds.
Term bonds are bonds that have a single fixed maturity date.
Serial bonds are structured so that a portion of the bonds mature at regular intervals until the entire issue is repaid. Serial bonds are pre-numbered bonds that the issuer may call and redeem a portion by serial number.
A bond sinking fund is a fund that a company contributes cash to each period so that it has enough to pay off the bond at maturity.

Present value of principal: $800,000 × 0.67556 (Present value of $1 for 10 periods at 4%) = 540,448.
Present value of interest payments: $40,000 × 8.11090 (Ordinary Annuity of $1 for 10 periods at 4%) = 324,436
Proceeds from bond: 864,884
(DR) Cash 864,884 / Bonds payable 1,000,000
(DR) Discount on bonds payable 153,116
Since it is semiannual payments based on state rate, the interest payments and discount rate (the market rate) should be half with double the duration.

The discount is recorded in a separate account and amortized, which affects the carrying amount of the bond. The final increase or decrease in long-term liabilities is determined by the difference between the face value of the new bond and the carrying amount of the old bond (considering the discount).

Bond issuance costs are deducted from the carrying value of the liability and included in the debit entry to bond discount upon issuance. As part of the discount from par, bond issuance costs are amortized over the life of the bond using the effective interest method.
Bond issuance costs reduce the cash received from the bond issuance and are deducted from the carrying value of the liability as a net premium.

<Detachable Warrants>

Allocation of Issue Price: Allocate the issue price based on the fair values of the bonds and warrants.
When the Fair Value of Warrants is Known: First allocate the fair value to the warrants, then allocate the remainder to the bonds.
Example: The total issuance of $4 million in bonds at 101 has a fair value of $4,040,000 ($4 million × 101 percent). Of the total amount, $200,000 (200,000 warrants × $1 fair value per warrant) is allocated to the warrants, with the remaining $3,840,000 allocated to the bonds.
Because the warrants are detachable, the issue price of the bonds and warrants together should be allocated based on each component’s fair values on the issuance date. Because the warrants’ fair value is known, the remainder of the issuance price not allocated to the warrants is allocated to the bonds.

<Non-Detachable Warrants>

Overall Evaluation of Issue Price: Evaluate the bonds and warrants as a single unit.
No Separate Valuation: Do not evaluate the fair value of the warrants separately; treat the entire issue price as the value of the bonds.

Accrued interest payable refers to the accounting term for interest that has accrued from the most recent interest payment date to the end of the reporting period but has not yet been paid. This account is used to record the interest expense as it is incurred, recognizing it as a liability until the actual payment is made. This ensures that the company’s financial statements accurately reflect expenses on an accrual basis.

Since this bond is issued between interest payment dates, the issuer will receive not only the issuance price but also accrued interest for the period between the interest payment date and the issuance date from the purchaser. Subsequently, the purchaser will receive the full interest payment on the next interest payment date.
(DR) Cash 1,900 (Issuance price 1,880 + Accrued interest 20)
(CR) Bonds payable 1,800, Accrued interest payable 20, Discount on Bonds payable 80 (difference between par value and issuance price)

Interest Payment : face amount of the bond times the stated rate
Interest Expense: the beginning carrying amount of the bond times the market rate
Amortization of premium amount (Premium on bonds payable): Face amount X Coupon Rate – Net carrying value X effective interest rate
The bond carrying value is face amount – the discount balance. The discount balance is initial balance – its amortized amount.

The settlement price is greater than the face value of the debt and the face value is greater than the book value. Therefore, the settlement price is greater than the book value and a loss would be recognized on the transaction.