Bond Flashcards
How to calculate amortization for Bonds?(periodic amortization)
Divide unamortized discount or premium by the number of periods the bounds are outstanding.
Is straight line method for bond amortization under IFRS allowed?
No. GAAP allows straight line method bond amortization but it has not to be material from effective interest method.
What interest do you use to calculate discount or a premium on bond?
Yield or market rate. Multiple by face value of a bond.
What interest do we use to calculate interest on bond?
Stated by bond rate. It does not change as well.
Where do you record interest expense on bonds interest? Where do we record the paid amount plus discount or minus premium?
Interest expense- income statement.
Paid(interest)+discount-premium on balance sheet.
Difference between bond discount and premium.
Discount decreases amount received when borrowing money, buying a bond.
Premiums increased amount received when borrowing money.
Do investors( who are lenders of bonds) record discount or premium on bonds?
No. They record the net bond proceeds.
When recording interest expense on bond what do borrower and investor recognize?
Borrower: expense and reduction discount. Payment is still the same.
Investor: revenue: interest +discount.
What is the difference between straight line method and effective interest rate for bond interest expense?
Straight line method is not GAAP but still allowed. IFRS does not permit s-l method. It gives constant amount for carrying amount of a bond. Effective rate method makes carrying amount of the bond be higher at premium than d-l method and lower than s-l method at discount. Unamortized premium or discount will be bigger under effective interest.
Amortization period for bonds , start day for GAAP and IFRS?
GAAP amortize bond discount or premium over contractual life (when it was sold) of bond.
IFRS amortize bond discount or premium over expected life of bond.
Do we record conversion features for convertible bonds under GAAP?
No. We records the issuance price to bonds with no recognition of conversion feature.
But under IFRS you can. Record bond liability at fair value including the difference for equity part.
The market price of a bond issued at a premium is equal to:
the present value of its principle and the present value of al future interest payments, at the market(effective) interest rate.
What are annuities?
Periodic payments or receipts at regular intervals such as bond interests and lease rental payments.
Present value of $1?
Amount that must be invested now at specific rate so that $1 can be paid or revived in the future like a bond principle
What is lease?
Contractual agreement between lessor, who conveys the right to use real or personal property and a lease, who agrees to pay periodic rents over a specified time.
What is operating lease?
Lessor collects rent, a lessee used the leased asset and pays periodic rent for such use. No transfer or ownership. It is a revenue for lessor and expense for lessee.
Does lessor have to depreciate leased by lessee fixed asset, how?
Yes. Depreciate over the asset’s useful life.
If lessee gives a no refundable security deposit to lessor, how should both have to account it ?
Lessor records as unearned revenue until he considers it as earned revenue. Lessee records prepaid rent expense then expense.
How do we treat lease bonus?
Deffer it. Record it as unearned income and amortize over the life of lease for lessor and record amortized portion into income.
Does lessee record depreciation for leased fixed assets ?
If lessee keeps assets at the end- depreciate the asset over the assets useful life, if he/she doesn’t depreciate the leased asset over the lease term.
Lessor still depreciate leased asset under straight line method over assets useful life.
What is capital lease?
It is financial lease for IFRS. Transfers substantially all of the benefits and risks in ownership of property to the lessee.
Does IFRS have different criteria to classify capital lease than GAAP?
No. The same. The most important fact is that the ownership will go to lessee. Weird cases: lessee recognizes gains or losses on leased asset, can change the fare value of leasing an asset, only lessee can use those leased assets due to specialized nature.
What is criteria for sales type lease? For lessor.
Lessee meets one of 4 criteria for capital lease.
No uncertainties about costs from lessor side.
Collectible of lease payments is predictable.
What is the difference between sales type and direct type lease for lessor?
Sales type: FV of lease>BV of lease at inception the difference gives profit or loss.
Except dealer or manufacturer which can not realize a profit or loss under GAAP but can be under IFRS.
Direct type: FV=BV. No profit or Loss.
Under sales and direct type transfer substantially all of ownership.
