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Financial Accounting and Reporting > Bonds > Flashcards

Bonds Flashcards

1
Q

Carrying Amount

A

Present value of face amount + Present value of all future interest payments at date of issuance

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2
Q

Cash paid

A

Face amount * Stated interest rate or coupon rate or nominal rate *1/2

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3
Q

Amortization

A

Cash paid - Interest expense

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4
Q

Unamortized premium

A

Carrying amount - Face amount

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5
Q

Interest Expense

A

Carrying amount at the beginning of the period * Effective Int rate or market rate or yield rate*(1/2)

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6
Q

(1) Effective annual Int rate

(2) Stated Rate

A

=(Int expense/carrying amount at the beginning of the period)*2

=Annual Int payment/Bond FV

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7
Q

Cash Interest Payment

A

Bond Face Value * Stated Coupon Rate

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8
Q

Interest Expense

A

Bond Carrying Value * Effective Interest Rate

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9
Q

Inverse relationship between market interest rates and bond prices.

A

True

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10
Q

Sinking Bonds can be repurchased in limited quantities periodically at specified prices.

A

True

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11
Q

Debentures

A

Backed by borrower’s general credit

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12
Q

Collateralized

A

Backed by specific assets

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13
Q

Cash Payment

A

is equal to Annuity (use annuity rate)
Cash or annuity payment is calculated based on
E.g. 10% Bond of 100000 paid semi-annually
Cash payment = 1000006/120.10=USD 5000

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14
Q

Face Value - Discount = CV
1000000-61000=939,000

A

Interest on CV = CV yield rate
e.g. 9390000.10=93,900

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15
Q

In a troubled debt restructuring, when the FV option is not elected, if a noncash asset is exchanged to settle the debt:

A

The noncash asset is revalued to FV, with a gain or loss recognized on the asset.

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16
Q

Bond premium amortization = Cash Interest Payment - Interest Income

Cash Interest Payment = Bond face value * Stated Coupon Rate
Less:
Interest Income = Bond Carrying Value * Effective Interest Rate

A
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17
Q

The primary reason for a company to agree to a debt covenant limiting the percentage of its long-term debt is

A

to reduce the interest rate on the bonds being sold.

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18
Q

If the covenant includes a subjective acceleration clause and there is only a remote chance that debt will be called, then the liability is classified as noncurrent.

A

True

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19
Q

Refinancing current debt on a long term basis and appropriating retained earnings helps a firm to maintain compliance with a debt covenant that includes a minimum current ratio and a minimum retained earnings balance.

A

True

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20
Q

If a long-term debt becomes callable due to the violation of a loan covenant, the debt must be reclassified as

A

CURRENT

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21
Q

The note payable should be presented in the Statement of Financial position _________________________

A

at the face amount minus a discount calculated at the imputed interest rate.

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22
Q

Notes payable are written promises to pay an amount of money on a specified future date. Goods or services issued in exchange for a note are recorded at _________

A
  • the FV of the note
  • the FV of the goods or services
  • the PV of the note using a fair interest rate
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23
Q

Interest payment (stated rate)

A

PV at Ordinary annuity rate

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24
Q

Bond issue or PV bond maturity

A

No. of bonds * PV of $1 for 10 periods

25
Q

Stated Rate

A

Annual Interest Payment/Bond Face Value

26
Q

________________ operations on the income statement is used when an entity disposes of a portion of its business, not a single holding or liability.

A

Discontinued

27
Q

Retiring bond will count as income from ______________________

A

Continuing operations

28
Q

The determination of whether a restructuring is troubled is based on the book value at the time of the restructuring, not the fair value of the debt.

A

True (TAKE FV in case of real etsate or assets)

29
Q

IF the equity (Common stock, preferred stock, options, etc.) create an unconditional obligation for the issuer to transfer assets - classify as __________________

A

Liability

30
Q

Discount - Interest expense is more than cash payments

A

True

31
Q

Equity method would be used if ownership is between _________

A

20% to 50% (significant influence)

32
Q

Adjusted cost method (cost minus impairment losses) will be used if ___________

A

less than 20% ownership of investee’s voting stock (No significant influence)

33
Q

A ST marketable debt security was purchased on Sep1, Yr 1 between int dates. The next int payment date was Feb 1, Yr 2. On the balance sheet at Dec 31, Yr 1, the debt security should be carried at _______

A

Fair Value. A short-term marketable debt security would be carried in a trading portfolio. Securities in trading portfolios are carried at FAIR VALUE.

34
Q

Equity method - Dividends will be recorded as a reduction of the investment account

A
35
Q

Interest expense will increase when Bond is issued at a discount

A

True (Int expense will be higher than Cash Interest Payment)

36
Q

Bond Issue Costs

A

Printing and engraving bond certificates, legal and accounting fees, underwriter commissions, promotion costs (printing the prospectus), registration

37
Q

Gains or Losses from the early extinguishment of debt should be __________

A

recognized in income before taxes in the period of extinguishment in the income statement at time of extinguishment (retirement)

38
Q

Bond sinking funds are non current assets. Purpose is to accumulate funds for the retirement of bonds. Interest and dividends added to fund balance and reported as income.

A

True

39
Q

Gain on restructuring of debt =

A

CV of note - FMV of land

40
Q

SL method (int expense is same) 2

A

=Discount or Premium/No. of periods

41
Q

Zero coupon bonds must use ___________

A

Effective Interest Method

42
Q

When the NONINTEREST bearing note is issued, the interest is recorded as a contra-account called DISCOUNT ON NR.

A

It is calculated as the difference between the FV of the note and its PV based on the mkt rate of int.

JE at the time of issuing the note

Notes receivable (Face amount) XX
Discount on Notes Recvable XX
Sales Revenue

Year end Adjusting entry

DIscount on Notes receivable XX
Interest Revenue XX

43
Q

Warrants treat as Bond issuance cost and subtract it from Bonds

A
44
Q

Ignorance of Amortization of premium will overstate both _______

A

CV of bond and Interest expense

45
Q

Effective rate

A

Market rate

46
Q

Detachable warrants

A

FV

47
Q

Stated = coupon interest rate

A

Bond Face Value *Stated coupon rate

48
Q

Interest expense is Bond CV *effective interest rate

A

Interest expense

49
Q

Discount

A

Interest expense is more (than payments)

50
Q

Premium

A

Interest expense is less (than payments)

51
Q

Reduce Bond Issuance cost from Discounted value of the bond

A

eg. par value = $1000000
Issued at a discount at $926399
Bond issuance cost = 20000
Net CV = $906399 (Issued price less Bond Issuance cost)

52
Q

Calculate accrued interest on par value e.g. April 1, issued 10% bonds dated Jan 1, face amount 1000000, issued for 926,399

A

Accrued interest will be from jan to March of $100000010%(3/12) = $25,000
Total Cash Received = 951,399

53
Q

A loan restructured in a troubled debt restructuring is an __________

A

impaired loan.

The impairment is recorded by creating a valuation allowance with a corresponding charge to bad debt expense.

Step 1: Sum of future cash flows
Less: PV of Principal
Add: PV coupon payments

Step 2: CV receivable - Sum of PVfuture cash flows = Impairment

Bad debt Expense XX
Allowance for Credit losses XX

54
Q

Debtor can only record a gain when assets or equity are transferred to extinguish debt

A

True,

JE for Troubled Debt Restructuring (when equity is transferred to get rid of loan)
________________________________________

Equity Investments Dr. XX
Allowance for credit losses (gain of
Debtor) XX
Note Receivable XX
Interest Receivable XX

OR

OLD debt XX
NEW debt XX
Gain/Loss XX

55
Q

A liability is considered extinguished if the debtor is __________ released from being the primary obligor under the liability, either judicially or by the creditor.

A

LEGALLY

A troubled debt restructuring would result in the extinguishment of debt only if the debt were forgiven by the creditor as the result of (1) A transfer of asssets or (2) the transfer of equity interest.

A modification of terms is not extinguishment.

56
Q

Common stock is reported at PAR VALUE in the ______________

A

Balance sheet

57
Q

Rights were exercised in YEar 2 in example

A

APIC will increase in year 2

58
Q

Gain on extinguishment

A

Report as Income from continuing operations (Gross not net of tax)

59
Q

Accrued Interest report as ____

A

Liability in the balance sheet

Financial Accounting and Reporting (31 decks)

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