Bond Debt Restructure

Question 1

How are changes in accounting principle applied?

Answer 1

Retrospective Application:
Prior Periods adjusted
Retained Earnings adjusted
Completed Contract to % Completion
Ex: LIFO to FIFO

Question 2

Would a change from Completed Contract to Percentage of Completion be a change in accounting principle- or a change of estimate?

How would it be applied?

Answer 2

A change of principle.

Applied retrospectively.

Question 3

Would a change from LIFO to FIFO be a change in accounting principle or a change of estimate?

How would this change be applied?

Answer 3

A change in accounting principle.

Applied retrospectively.

Question 4

How is a change in accounting estimate applied?

Answer 4

A change in accounting estimate is applied prospectively (going forward).

No backwards adjustment is made.

Question 5

Would a change from straight line depreciation to double declining balance be a change in accounting principle or a change in estimate?

How would this change be applied?

Answer 5

Change in depreciation method would be a change in accounting estimate.

It is applied prospectively.

Question 6

How is a correction of an accounting error made?

Answer 6

Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements.

The correction of the error must be included in the footnotes.

Question 7

What are the requirements for a prior period adjustment?

Answer 7

Effect is Material

Is identifiable in Prior Period

Couldn’t be estimated in Prior Periods

Question 8

How is a change from a non-GAAP accounting method to a GAAP method recorded?

Answer 8

It is treated as a correction of an accounting error.

Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements

Correction of the error must be included in the footnotes

Question 9

How does an inventory error effect the financial statements?

Answer 9

Effect on Ending Inventory : Effect on Net Income

If one is overstated- both overstated. If one is understated- both understated.

Misstating inventory corrects itself after TWO periods.

Question 10

How is a change in entity recorded?

Answer 10

Applied retrospectively.

All prior periods presented for comparative purposes must reflect the change

Footnote disclosures must be made

Changing to Consolidated Statements

Question 11

What is a serial bond?

Answer 11

Any bond that matures in installments

Question 12

What is a term bond?

Answer 12

Any bond that matures on a single date

Question 13

What is a debenture bond?

Answer 13

A bond not secured by any collateral

Question 14

What is a sinking fund bond?

Answer 14

Cash is held in a sinking fund for repayment of bond at maturity

5 years of requirements and maturity details should be disclosed

Question 15

What is the formula to calculate proceeds of a bond sale?

Answer 15

Present Value of the principal payment at maturity+ Present Value of Interest Payments made
: Market Value of Bond Proceeds

Question 16

How is the present value of a bond calculated?

Answer 16

Step 1: PV of $1 @ Yield Rate (not Stated Rate)
x Bond Face Value

PLUS

Step 2: PV of an Ordinary Annuity of $1 for Term @Yield
x (Stated Rate x Face)

Question 17

Which costs are included in bond issuance costs? How are they recorded?

Answer 17

Include Engraving; Printing; Legal; Underwriter; Registration

Debited to a deferred charge account and amortized over life of Bond using S/L

Bond Proceeds - Bond Issuance Costs : Net Bond Proceeds

Time of amortization begins when issued

Question 18

How are bonds reported when classified as trading securities?

Answer 18

Reported at FMV with unreleased gains and losses being included in earnings

Question 19

How are bonds amortized under the interest method?

Answer 19

Both discount and premium amortization amounts increase each year

Question 20

Describe the book value method when converting from bonds to stocks.

Answer 20

No gain or loss recognized

APIC is the plug for the difference between the Bond’s Book Value and the Par Value of the Common Stock

Question 21

What is the stated rate for a bond?

Answer 21

Rate on the face of the bond

Question 22

What is the market rate on a bond?

Answer 22

Rate that bonds are currently selling for

Question 23

What happens when the bond’s market rate is greater than the stated rate?

Answer 23

Bond will need to sell at a discount in order for buyers to be interested. The difference in market rate vs. the stated is made up by the buyer purchasing the bond for less than par value

Question 24

What happens when a bond’s market rate is less than the stated rate?

Answer 24

Bond will need to sell at a premium in order for buyers to be interested. The difference in market rate vs. the stated is made up by the buyer purchasing the bond for more than par value

Question 25

How does accrued interest on a bond affect the purchase price?

Answer 25

The total cash that seller receives will be MORE than they normally would (set aside any considerations for premium or discount; they are irrelevant for this point).

Basically; the purchaser of the bonds must give the bond issuer the amount of accrued interest up front.

Question 26

When does interest expense start accruing on a bond?

Answer 26

When the bonds are issued

Question 27

How is an interest payment on a bond calculated?

Answer 27

Cash for payment : Stated rate x Face amount

Question 28

What amount of interest is expensed on a bond interest payment?

Answer 28

Interest expense : effective yield x carrying value

Any difference between expense and cash payment is applied as amortization against premium/discount

Question 29

What are convertible bonds? Which recording method is used?

Answer 29

Bonds that can be converted to stock

Book value method used if no gain or loss

Market value method used if there is a gain or loss

Question 30

How is the retirement of bonds recorded?

Answer 30

Gain or Loss is Ordinary

Extraordinary if both unusual and infrequent

Question 31

When is a gain recognized in a debt restructuring?

Answer 31

If terms are modified; and future payments are now less than the carrying amount of the debt; then a Gain is recognized

Question 32

What is the gain recognized under a settlement of debt?

Answer 32

Gain recognized:

Difference between cash paid and carrying amount of debt

Difference between non-cash asset given and re-valued at FMV and debt carrying amount

Question 33

For a creditor; how is a loan impairment recorded?

Answer 33

If future cash flows discounted at loan’s Effective Interest Rate are less than Carrying Value:

Effective Rate calculated using original rate; not modified rate