Bonds: Class Questions - YouTube

Okay let's do some questions to help emphasize some of the exciting stuff we've learned in

bonds so far.

Question number one.

It says what are the total amounts of serial bonds and debenture bonds?

Oh what is a serial bond?

Om nom nom nom nom.

Every day installments.

It is a bond that matures in installments.

So that million dollars.

Instead of getting it at the end of the term, I'm going to get 200, 200, 200, 200, 200,000

a year for five years is a million bucks.

That's a serial bond, installments.

What is a debenture bond, dentures?

No it's an unsecured bond.

Alright Handcock's December 31st balance sheet contain the following items in the long term

liability section.

Unsecured, secured.

What are unsecured?

Debenture.

So 9.375 registered bonds.

250,000 maturing annually.

That is an installment.

Annually, that would be a serial bond.

275.

11 and a half percent convertible bonds callable beginning in the next 11, due in 23.

That's the end of the what?

Term.

Secured, 9.875.

Due 23.

That is the end of the term.

And 10 percent commodity back to bonds.

50,000 maturing annually, installments.

That would be serial.

What are the total amounts of serial bonds and debenture bonds?

So unsecured or debenture which gives you 275 and 125 which is 2 3 400, which is unsecured.

So that's going to be either A or C. Okay?

Now what about the serial bonds?

That's annually.

Which is 275 plus 200 or 475 which is answer A. So notice 475, 400, answer A.

Now if I had a question like this and I had no clue as I look down the choices, and this

is kind of a cheat sheet way, it doesn't always work but if I were clueless, I'd go 475, 475,

450, 200, so they have two 475s so it's probably one of those.

Then they have 400, 125, 400, 650.

They have two 400s so it's probably a 475 and a 400 because they got em twice in each

column.

Oh we love that.

Now when they add a third column, messes everything up.

So if you ever get this again, I'd rather you just understand the answer.

If you're clueless, hey, at least it's better than just guessing.

Next question, number two, last sentence first.

At June 30th X3, what amount should king recognize as gain before taxes on redemption of bonds?

So what are they doing?

They're redeeming the bonds, or they're calling back the bonds.

They're retiring the bonds.

Okay now.

Bond retirement, what is it?

It's the opposite entry.

Whoooop.

So bonds payable, get rid of premium or discount, get rid of advertised bick.

You pay some cash, differences gained or lost.

Now they said ignoring taxes, why?

Because if it's an ordinary gain or loss then you would just put it in gross, take out taxes

later.

And I'll show you this when I teach you deferred taxes.

If instead, it is an extraordinary gain or loss, then you'd take net of tax.

If I had an extraordinary gain of 100 dollars, government says beautiful, you made 100, you

owe me 30.

What am I left with?

Net of tax 70.

Here they said forget about tax, just give us the number.

Okay they want to know how much the gain before tax is.

Alright on June 30th King Ko had outstanding nine percent 5,000,000 face value bonds maturing

on June 30th, X8.

Interest was payable semi-annually every June 30th and December 31st.

King did not elect the fair value option for reporting financial liabilities.

So don't worry about fair value.

Do regular bond accounting.

On June 30th, after amortization was recorded for the period, the unamortized bond premium

and bond issue costs were 30 and 50 respectively.

Now I circle the word respectively because I want to make sure you understand it.

Again I have a lot of international students.

English isn't their first language.

Respectively means the first word goes with the first dollar amount, the second word goes

with the second dollar amount.

So it said unamortized bond premium and bond issue costs were 30 and 50 respectively.

So unamortized bond premium is 30.

Bond issue costs are 50.

On that date, king acquired all of its outstanding bonds on the open market at 98.

And retired them.

Now two things.

They reacquired all.

What does all mean?

100 percent.

What if they only got back 60 percent?

Then only get rid of 60 percent of the premium or discount.

60 percent of the bic.

See what I'm saying?

Because you still have some bonds outstanding.

But we got rid of all.

Which is what?

100 percent.

And we paid how much?

98.

What does 98 mean?

98 percent of face.

Now how much is face?

5,000,000.

What's 98 percent of face?

98 percent of 5,000,000.

Alright so let's go through here.

We had what?

We had unamortized bond premium.

Boom.

So let's get rid of the discount.

Alright first of all.

Get rid of bonds payable.

How much?

5,000,000 bucks.

I'm going to leave the zeros off.

It said we paid 98 percent of this which gives you 4 million 9.

Unamortized premium, unamortized bic.

Unamortized premium was 30, and unamortized bic was 50.

So premium is 30, bic is 50.

Okay, so by doing the journal entry, the answer just falls into your lap.

So what we're saying here is we've got 5,000,030, 4,000,950.

To get from 4,000,950 to 5,000,030, we need another 80.

So how much is our gain? $80,000 which is answer B. Gain, 80.

Next question.

What should be the issue price for each thousand dollar bond?

How much is the issue price for every thousand dollar bond?

Alright.

The following information pertains to camp code issues its bonds on July 1st.

Now I'm going to show you a quick word.

July means what?

You lie!

July, you lie.

How did they lie?

Because quite often with July, that is the middle of the year.

So July, you lie.

Think of half a year.

Okay just in case.

May or may not relate to this question, but July, you lie.

Alright.

Face amount 800,000.

Term, 10 years.

Stated interest rate, six percent.

Remember that's six percent of the face.

That's the interest we're going to get, that's the cash.

Interest payment dates annually July 1st.

Yield, nine percent.

Now what is the yield?

The yield, the market, the effective is nine percent.

So I want to earn nine, but they're going to pay me six.

What is that, a discount or premium?

Hmm.

They're going to pay me six but I want to earn more.

You better charge me less.

That's a discount, very good.

Alright, present value of one for 10.

So now that they give you the present value factors, you need to pick the right one to

use.

Present value of one, of a dollar for ten periods.

Okay?

Future value, we rarely use that.

Present value ordinary annuity.

That's for the interest.

So we'll need to use that, alright?

And they want to know, hey, what is it?

What should be the issue price for each thousand dollar bond?

How much cash are we going to get?

So basically we're doing a bond payable.

We're going to issue the bond, but the bond payable's going to be for one bond.

So it's going to be bond payable one thousand.

Now we're going to get some cash, and we're going to have some discount.

How do I know it's a discount?

Because it's paying me six and I want to earn nine.

Now remember when you're present valuing, let's come back over here.

Remember here we did the present value earlier?

It's paying eight.

That's stated, eight percent.

But I want to earn 10.

You then present value at the effective rate, the rate you want to earn.

Okay that's how you present value it.

So in this particular case, what's it say?

It says it's paying me cash of six percent but I want to earn nine.

So how much is it paying me?

A thousand dollar bond.

It's paying me six percent.

So a thousand dollar bond if I want to use this set up, its a thousand dollars at six

percent.

It's going to pay me 60 dollars.

So I have to present value this and this.

So its a thousand dollar present value of a lump sum in how many years was this bond?

The bond was 10 years.

10 years, and I want to earn nine percent.

So what that tells me is the present value, a thousand present value, nine percent is

.422. .422 times a thousand is what?

422 bucks.

Okay, got that.

That makes sense.

The next one is present value of annuity.

Now what is the annuity that I'm getting?

I'm getting 60 dollars at 6.418.

So that's 60 dollars at 6.418 is I think what I said.

That's not 60 percent, that's 60 dollars.

6.418, 60, is 385.

When you add this plus this, that's four and three is seven.

That's 807, 807.

So 807 is the cash.

Discount would be 193.

And that would be my journal entry.

So how much?

807, answer C as in si senor.

So what is that telling you?

It's telling you again that what we're doing is we're present valuing two things, the bond

and the interest.

The bond present value lump sum.

10 years, nine percent, boom .422 is the factor. 1,000 is 422.

So in other words, if you're going to give me a thousand dollars in 10 years and I want

to earn nine percent, I should put 422 dollars in the bank today, it'll grow to a thousand

dollars in 10 years at nine percent.

Over here 60, 10 years, and I want to earn nine percent.

That's going to be an annuity of 6.418.

That means that if I'm going to get 60, 60, 60, 60, 60-- I'm going to get 600 bucks right?

10 times, 600 bucks.

But it's really only worth 385 because the time value of money.

When you add em up, 807.

That's what I should charge as far as getting.

That's how much cash I should get from issuing that bond.