Bonds Flashcards
What are warrants?
Are option contracts that are issued with, and detachable from, BONDS (and notes).
The warrant gives the bond holders the right to buy stock at fixed price within a specific time period.
Should alternative use be expensed or capitalized?
It would be capitalized over its useful life, only if the equipment had an alternative
use.
Company J acquired all of the outstanding common stock of Company K in exchange for cash. The acquisition price exceeds
the fair value of net assets acquired. How should Company J determine the amounts to be reported for the plant and
equipment and long-term debt acquired from Company K?
When the acquisition price exceeds the fair value of net assets acquired, assets and liabilities should be presented at fair value.
A company issued a bond with a stated rate of interest that is less than the effective interest rate on the date of issuance. The
bond was issued on one of the interest payment dates. What should the company report on the first interest payment date?
An interest expense that is greater than the cash payment made to bondholders. Because the stated rate of interest is less than the effective interest rate when the bond is issued, this
bond is issued at a discount.
How should non-current vs current asset vs liabilities be recorded on balance sheet under US GAAP? (net wise)
Rule 1: All current deferred tax liabilities and assets must be offset and presented as one amount.
Rule 2: All noncurrent deferred tax liabilities and assets of a particular tax jurisdiction must be offset and presented as one
amount.
Stock dividends on common stock should be recorded at their fair market value by the investor when the related investment
is accounted for under which of the following methods?
Rule: Stock dividends and stock splits are not considered income to the recipient.
Therefore, investors do not record stock dividends at fair market value. They simply reallocate the investment account
balance (under either method – cost or equity) over more shares so that value per share decreases.
On March 1, Year 1, Somar Co. issued 20-year bonds at a discount. By September 1, Year 6, the bonds were quoted at 106
when Somar exercised its right to retire the bonds at 105. The amount is material and considered to be unusual in nature and
infrequently occurring with respect to Somar Co. How should Somar report the bond retirement on its Year 6 income
statement under U.S. GAAP? Continued Operations/Extraordinary and Gain/Loss
The settlement price is greater than the face value of the debt and the face value is greater than the
book value. Therefore, the settlement price is greater than the book value and a loss would be recognized on the transaction.
This loss would be classified as “extraordinary” because it meets the U.S. GAAP criteria.
Treasury Stock Sold - Stockholders Equity
-Treasury stock sold in excess of cost does not affect retained earnings (no gain/loss - recorded in APIC.
-Note: Because the state of incorporation protects treasury stock from dilution, the 2-for-1 stock split also increases treasury
shares
-Don’t net with shares issued
The primary purpose of a quasi-reorganization is to give a corporation the opportunity to:
Eliminate a deficit in retained earnings. The primary purpose of a quasi-reorganization is to eliminate a retained earnings deficit so that future
earnings will be available for dividends rather than limited to offsetting the retained earnings deficit. ARB 43 Ch 1A para. 2
What was Stent’s debt to-
equity ratio?
Equity = Capital stock + Retained earnings Liabilities = Assets - Equity =
Which of the following financial categories are used in a nongovernmental not-for-profit organization’s statement of financial position?
Asset, liabilities, net assets.
Statement of Activities generally accounts for changes in all classifications of net assets- unrestricted, temporary, permanent.
In applying the criteria used for determination of major funds required for reporting in a government's fund financial statements, a government would consider which of the following statistics? Aggregate Revenues or Expenditures/Expenses Aggregate Assets or Liabilities Aggregate Fund Balance/Equity a. Yes No No b. Yes Yes Yes c. No Yes Yes d. Yes Yes No
Rule: The criteria for determining major funds includes qualification as to revenues, expenditures/expenses, assets, or
liabilities that are at least 10 percent of the associated total for ALL governmental OR enterprise (as appropriate) AND at
least 5 percent of the total of the associated totals for ALL governmental AND enterprise funds.
The Jackson Foundation, a not-for-profit organization, received contributions in Year 1 as follows:
Unrestricted cash contributions of $500,000.
Cash contributions of $200,000 to be restricted to acquisition of property.
Jackson’s statement of cash flows in Year 1 should include which of the following amounts?
Operating
activities
Investing
activities
Financing
activities
a. $700,000 $0 $0
b. $500,000 $0 $200,000
c. $500,000 $200,000 $0
d. $0 $500,000 $200,000
Choice “b” is correct. The unrestricted cash contributions totaling $500,000 are reported as increases in operating activities in
the statement of cash flows. The $200,000 restricted cash contributions are reported as increases in financing activities since
the restriction is the acquisition of property, not general operations.
A nongovernmental not-for-profit organization borrowed $5,000, which it used to purchase a truck. In which section of the
organization’s statement of cash flows should the transaction be reported?
a. In cash inflow and cash outflow from financing activities.
b. In cash inflow from financing activities and cash outflow from investing activities.
c. In cash inflow from operating activities and cash outflow from investing activities.
d. In cash inflow and cash outflow from investing activities.
Choice “b” is correct. For a nongovernmental not-for-profit organization, the borrowing would be a cash inflow from financing
activities, and the purchase of the truck would be a cash outflow from investing activities. For a nongovernmental not-forprofit
organization, the commercial format for the statement of cash flows is followed.
Which of the following financial categories are used in a nongovernmental not-for-profit organization’s statement of financial
position?
a. Income, expenses, and unrestricted net assets.
b. Net assets, income, and expenses.
c. Assets, liabilities, and net assets.
d. Changes in unrestricted, temporarily restricted, and permanently restricted net assets.
Choice “c” is correct. A not-for-profit organization classifies balances in its statement of financial position as assets, liabilities,
and net assets.
