[ICM117]

I struggle with bonds so much. Does anyone have any tips with how to tackle this topic? I’m open to all suggestions and recommendations!!

[passedthecpa12.6.13]

Okay, what materials are you using to study? Becker actually has a really nice, intuitive bond chapter with journal entries and examples.

[passedthecpa12.6.13]

Okay, what materials are you using to study? Becker actually has a really nice, intuitive bond chapter with journal entries and examples.

[ICM117]

I am using Becker. I don't know why but i'm really struggling to wrap my head around the whole thing. i dont' know if i'm going to quickly or what it is that i'm doing wrong… i definitely do need to review the journal entries for sure though

[ICM117]

I am using Becker. I don't know why but i'm really struggling to wrap my head around the whole thing. i dont' know if i'm going to quickly or what it is that i'm doing wrong… i definitely do need to review the journal entries for sure though

[passedthecpa12.6.13]

Okay, let me try to hit what you may be having trouble wrapping your head around.

Let's go over one example on F-5 page 33.

1 million, 5 year, 10% coupon, semi-annual, with the market current going at 12%

Right off the bat, we know it is a discount bond because the market rate is 12%, and the coupon is less at 10%. 10 is less than 12, so it is a discount to the market, and we are not getting the full cash. We are getting less cash than the 1,000,000 million (a debit of 926,395 to cash in the example) so there is a debit of a discount of 73,605 to equal out the full 1,000,000 credit of bonds payable we will have to pay someone one day.

The semi-annual payments are 1,000,000 multiplied by .05, (one half of 10% coupon) and this gives 50,000. There are ten 50,000 payments and 1,000,000 at the end. This means we can get the PV of the 50,000 payments as a ten year annuity, and the lump sum of 1,000,000 at the end as a simple present value (using the market rate to PV for both at 6%)

Next, the important part you want to focus on is the effective rate method.

We start with the 926,395, and multiple it by the 6% to get the interest expense of 55,585. Moreover, we know we have to pay 50,000 cash so there is a credit of 50,000 to cash, and the interest expense is a debit. This leaves a 5,585 credit to the discount. We also add the 5,585 to the 926,395 to get to the beginning of period net carrying value, which we will then multiply by 6% to get 55,920, and we know there is a 50,000 credit to cash, so there is a credit to the discount of 5,920. We then add the 5,920 and continue the process….

The premium follows the same exact logic (albeit somewhat changed in journal entries), however, it diverges because our coupon is higher than the market rate, so we get the full 1,000,000 in cash, and there is a credit to the premium, which is similarly amortized (but down) toward the 1,000,000 instead of working our way up toward the 1,000,000 with the discounted bond's 5,585 and 5,290.

[passedthecpa12.6.13]

Okay, let me try to hit what you may be having trouble wrapping your head around.

Let's go over one example on F-5 page 33.

1 million, 5 year, 10% coupon, semi-annual, with the market current going at 12%

Right off the bat, we know it is a discount bond because the market rate is 12%, and the coupon is less at 10%. 10 is less than 12, so it is a discount to the market, and we are not getting the full cash. We are getting less cash than the 1,000,000 million (a debit of 926,395 to cash in the example) so there is a debit of a discount of 73,605 to equal out the full 1,000,000 credit of bonds payable we will have to pay someone one day.

The semi-annual payments are 1,000,000 multiplied by .05, (one half of 10% coupon) and this gives 50,000. There are ten 50,000 payments and 1,000,000 at the end. This means we can get the PV of the 50,000 payments as a ten year annuity, and the lump sum of 1,000,000 at the end as a simple present value (using the market rate to PV for both at 6%)

Next, the important part you want to focus on is the effective rate method.

We start with the 926,395, and multiple it by the 6% to get the interest expense of 55,585. Moreover, we know we have to pay 50,000 cash so there is a credit of 50,000 to cash, and the interest expense is a debit. This leaves a 5,585 credit to the discount. We also add the 5,585 to the 926,395 to get to the beginning of period net carrying value, which we will then multiply by 6% to get 55,920, and we know there is a 50,000 credit to cash, so there is a credit to the discount of 5,920. We then add the 5,920 and continue the process….

The premium follows the same exact logic (albeit somewhat changed in journal entries), however, it diverges because our coupon is higher than the market rate, so we get the full 1,000,000 in cash, and there is a credit to the premium, which is similarly amortized (but down) toward the 1,000,000 instead of working our way up toward the 1,000,000 with the discounted bond's 5,585 and 5,290.

[MintsRGood]

Anytime I see a bond problem, I start by journalizing what I know about the transaction immediately! Often times on MCQs, preparing a journal entry and a quick t-account will save you a tremendous amount of time if they are asking for something fairly straightforward. Also, the ability to be quick in preparing an effective interest schedule can give you a wealth of info to handle a complex MCQ and especially on sims.

If you are consistently stuck, find an example in your review text of a multi year bond problem that shows journal entries and the effective interest schedule and work it front to back and back to front until you can see it in your sleep! Bonds are somewhat mechanical, so develop consistent process for solving and you'll get the hang of it. Practice makes perfect! 🙂

REG: 75 DONE 🙂
AUD: 61, 71, 68, 92 DONE 🙂
BEC: 76 DONE 🙂
FAR: 72, 74, 79 DONE 🙂
Licensed Michigan CPA 🙂
-Some people dream of success...others wake up and work hard for it!!!
-The cowards never start and the weak die along the way!
-You better work, b***h!
-Only those who dare to fail greatly can ever achieve greatly.-JFK

[MintsRGood]

Anytime I see a bond problem, I start by journalizing what I know about the transaction immediately! Often times on MCQs, preparing a journal entry and a quick t-account will save you a tremendous amount of time if they are asking for something fairly straightforward. Also, the ability to be quick in preparing an effective interest schedule can give you a wealth of info to handle a complex MCQ and especially on sims.

If you are consistently stuck, find an example in your review text of a multi year bond problem that shows journal entries and the effective interest schedule and work it front to back and back to front until you can see it in your sleep! Bonds are somewhat mechanical, so develop consistent process for solving and you'll get the hang of it. Practice makes perfect! 🙂

REG: 75 DONE 🙂
AUD: 61, 71, 68, 92 DONE 🙂
BEC: 76 DONE 🙂
FAR: 72, 74, 79 DONE 🙂
Licensed Michigan CPA 🙂
-Some people dream of success...others wake up and work hard for it!!!
-The cowards never start and the weak die along the way!
-You better work, b***h!
-Only those who dare to fail greatly can ever achieve greatly.-JFK

[Anonymous]

I just study about 80% of this topic today and I found very helpful how my review course addressed the bond concepts and problems (Roger), I think you have to put yourself in the lowest level to understand how and why the journal entries are recorded and write down every exception to the rule.

Good luck!

[Anonymous]

I just study about 80% of this topic today and I found very helpful how my review course addressed the bond concepts and problems (Roger), I think you have to put yourself in the lowest level to understand how and why the journal entries are recorded and write down every exception to the rule.

Good luck!

[Anonymous]

I always felt that if you know the check amount for the effective interest method (face value * coupon rate) and you know that premium bonds we move down towards the face and discounts we move up towards the face you can make an amortization table that is relatively straightforward.

Also with the journal entries, I felt that if you grasp the general journal entry for both. The borrower (asked most often) or investor you would be ok because that entry is coming directly from the amortization table. If you grasp the effective interest rate method amortization table that translation is smooth onto the journal entries, which is really derived from the amortization table directly. My advise is create a couple of amortization tables, do a few problems and write the journal entries from the amortization tables and you will nail it. Best wishes.

[Anonymous]

I always felt that if you know the check amount for the effective interest method (face value * coupon rate) and you know that premium bonds we move down towards the face and discounts we move up towards the face you can make an amortization table that is relatively straightforward.

Also with the journal entries, I felt that if you grasp the general journal entry for both. The borrower (asked most often) or investor you would be ok because that entry is coming directly from the amortization table. If you grasp the effective interest rate method amortization table that translation is smooth onto the journal entries, which is really derived from the amortization table directly. My advise is create a couple of amortization tables, do a few problems and write the journal entries from the amortization tables and you will nail it. Best wishes.

[Author]

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