Bonds Flashcards
Carrying Amount
Present value of face amount + Present value of all future interest payments at date of issuance
Cash paid
Face amount * Stated interest rate or coupon rate or nominal rate *1/2
Amortization
Cash paid - Interest expense
Unamortized premium
Carrying amount - Face amount
Interest Expense
Carrying amount at the beginning of the period * Effective Int rate or market rate or yield rate*(1/2)
(1) Effective annual Int rate
(2) Stated Rate
=(Int expense/carrying amount at the beginning of the period)*2
=Annual Int payment/Bond FV
Cash Interest Payment
Bond Face Value * Stated Coupon Rate
Interest Expense
Bond Carrying Value * Effective Interest Rate
Inverse relationship between market interest rates and bond prices.
True
Sinking Bonds can be repurchased in limited quantities periodically at specified prices.
True
Debentures
Backed by borrower’s general credit
Collateralized
Backed by specific assets
Cash Payment
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
Face Value - Discount = CV
1000000-61000=939,000
Interest on CV = CV yield rate
e.g. 9390000.10=93,900
In a troubled debt restructuring, when the FV option is not elected, if a noncash asset is exchanged to settle the debt:
The noncash asset is revalued to FV, with a gain or loss recognized on the asset.
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
The primary reason for a company to agree to a debt covenant limiting the percentage of its long-term debt is
to reduce the interest rate on the bonds being sold.
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.
True
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.
True
If a long-term debt becomes callable due to the violation of a loan covenant, the debt must be reclassified as
CURRENT
The note payable should be presented in the Statement of Financial position _________________________
at the face amount minus a discount calculated at the imputed interest rate.
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 _________
- the FV of the note
- the FV of the goods or services
- the PV of the note using a fair interest rate
Interest payment (stated rate)
PV at Ordinary annuity rate
Bond issue or PV bond maturity
No. of bonds * PV of $1 for 10 periods
Stated Rate
Annual Interest Payment/Bond Face Value
________________ operations on the income statement is used when an entity disposes of a portion of its business, not a single holding or liability.
Discontinued
Retiring bond will count as income from ______________________
Continuing operations
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.
True (TAKE FV in case of real etsate or assets)
IF the equity (Common stock, preferred stock, options, etc.) create an unconditional obligation for the issuer to transfer assets - classify as __________________
Liability
Discount - Interest expense is more than cash payments
True
Equity method would be used if ownership is between _________
20% to 50% (significant influence)
Adjusted cost method (cost minus impairment losses) will be used if ___________
less than 20% ownership of investee’s voting stock (No significant influence)
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 _______
Fair Value. A short-term marketable debt security would be carried in a trading portfolio. Securities in trading portfolios are carried at FAIR VALUE.
Equity method - Dividends will be recorded as a reduction of the investment account
Interest expense will increase when Bond is issued at a discount
True (Int expense will be higher than Cash Interest Payment)
Bond Issue Costs
Printing and engraving bond certificates, legal and accounting fees, underwriter commissions, promotion costs (printing the prospectus), registration
Gains or Losses from the early extinguishment of debt should be __________
recognized in income before taxes in the period of extinguishment in the income statement at time of extinguishment (retirement)
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.
True
Gain on restructuring of debt =
CV of note - FMV of land
SL method (int expense is same) 2
=Discount or Premium/No. of periods
Zero coupon bonds must use ___________
Effective Interest Method
When the NONINTEREST bearing note is issued, the interest is recorded as a contra-account called DISCOUNT ON NR.
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
Warrants treat as Bond issuance cost and subtract it from Bonds
Ignorance of Amortization of premium will overstate both _______
CV of bond and Interest expense
Effective rate
Market rate
Detachable warrants
FV
Stated = coupon interest rate
Bond Face Value *Stated coupon rate
Interest expense is Bond CV *effective interest rate
Interest expense
Discount
Interest expense is more (than payments)
Premium
Interest expense is less (than payments)
Reduce Bond Issuance cost from Discounted value of the bond
eg. par value = $1000000
Issued at a discount at $926399
Bond issuance cost = 20000
Net CV = $906399 (Issued price less Bond Issuance cost)
Calculate accrued interest on par value e.g. April 1, issued 10% bonds dated Jan 1, face amount 1000000, issued for 926,399
Accrued interest will be from jan to March of $100000010%(3/12) = $25,000
Total Cash Received = 951,399
A loan restructured in a troubled debt restructuring is an __________
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
Debtor can only record a gain when assets or equity are transferred to extinguish debt
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
A liability is considered extinguished if the debtor is __________ released from being the primary obligor under the liability, either judicially or by the creditor.
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.
Common stock is reported at PAR VALUE in the ______________
Balance sheet
Rights were exercised in YEar 2 in example
APIC will increase in year 2
Gain on extinguishment
Report as Income from continuing operations (Gross not net of tax)
Accrued Interest report as ____
Liability in the balance sheet
