Bond Fair Value Option

Question 1

How is interest expenses on the current line of an effective interest bond amortization schedule computed?

Answer 1

Multiply one-half the yield rate at date of issuance by the book value of the bond issue on the line above the current line.

Question 2

What is the balance sheet effect of the fair value option applied to financial liabilities?

Answer 2

Report liability at fair value

Question 3

What is the income statement effect of the fair value option applied to financial liabilities?

Answer 3

Recognize gain or loss for the change in the fair value adjustment of the liability during the period.

Question 4

How is total interest expense for a bond issue using an effective interest bond amortization schedule (assume a premium) computed?

Answer 4

Sum of the cash interest column less sum of amortization of premium column

Question 5

What is the international treatment of debt issue costs?

Answer 5

Reduction in the proceeds from the debt

Question 6

Is the fair value option for financial liabilities required and to what securities is it applied?

Answer 6

It is an option (not required) and can be applied to any and all financial liabilities.

Question 7

What is the international applicability of the fair value option?

Answer 7

Limited to liabilities that are part of a group with financial assets managed together