Bonds

Question 1

Interest Payable/ Interest Expense

Answer 1

Interest Payable
- Fixed Each month
Interest Expense
- Discount or premium amortization on a bond
The difference between the face and present value of the note or bond is recognized as interest income - or expensed over the life of the instrument

Question 2

Gain on Troubled Debt Restructuring

Answer 2

Total Due on Debt - Required Restructured Payment

Question 3

Modification of Terms

Answer 3

• Total scheduled cash payments are less than the carrying value of the debt:
  ○ Reduce carry value of debt to total scheduled cash payments (kind of like fair value)
  ○ Recognize gain (carry value of debt - total rescheduled cash payment)
  ○ Recognize all future payments as principal, reducing payable
  Even if the payment includes interest

Question 4

Interest Rate not Stated on a Note:

Answer 4

• Record the note at the fair value of the property, goods, services exchanged
  
  • Or the amount that approximates the market value of the note
    Whichever is clearly more determinable

Question 5

When a note is discounted from a bank:

Answer 5

• Subtract the amount of discount from the face value of the note
  Add the monthly amortization back to the Face Value of the note

Question 6

Interest Rate stated on Bond/Issue Price of a Bond

Answer 6

Interest Rate stated on Bond:
- Stated, Coupon, Contract or Nominal rate
Issue Price of a Bond
- Face amount at maturity of bonds
Interest based on a stated percentage of the face amount

Question 7

Bond Types

Answer 7

Serial Bonds
- Mature in installments (maturing annually)
Debenture Bonds
- Unsecured debt
- Bonds can be both serial and debenture
Term Bonds
Bonds scheduled to be outstanding for a fixed period of time, or term

Question 8

Bond Issuance Costs

Answer 8

• Direct reduction from the carrying amount of debt liability
  
  • Amortization of debt issuance costs is reported as interest expense
    Promotion costs, engraving and printing, underwriter’s commissions

Question 9

Yield/Market Rate

Answer 9

Premium/Discount is determined using this rate against the stated rate

Question 10

Revenue for the Bond Holder

Answer 10

• Cash received as interest (based on the face value and the stated rate)
  Plus the amortized discount or premium

Question 11

Bond Retirement -

Answer 11

Difference between the reacquisition price (what you pay) and the carrying amount of the bond is calculated as the gain or loss

Question 12

Detachable Stock Purchase Warrants

Answer 12

• Warrant gives the debt holder the right to purchase a specified number of shares of stock at a specified price
  
  • If warrants are detachable, the proceeds from the bond issue must be allocated between the debt and the warrants on the basis of their relative fair values
  • Amount allocated to warrants is accounted for as APIC
  • Ex: Allocated to bonds:
    Value of Bonds without warrants/ Value of bonds without warrants + value of warrants X Face amount of bonds + warrants

Question 13

Conversion of Bonds into Equity

Answer 13

• Carry value of bonds is removed from company’s books
  
  • Bonds Carry Value +/- any unamortized premium or discount to get the total bond carry value
  • Upon conversion of equity, stock goes into CS account at number of shares X par value
    Any leftover bond value goes into APIC

Question 14

Debtor’s gain on restructuring:

Answer 14

• Gains are calculated on undiscounted amounts, whereas the creditors losses are used to include present values
  
  • Total future cash payments, including interest, are used to compute the gain on troubled debt restructuring
    Gain/Loss on Transfer of Assets - difference between the fair value and carrying value of the liability liquidated

Question 15

Unconditional Purchase Commitment

Answer 15

Not reported on balance sheet, but disclosed in the notes to financial statements at the present value of future required payments