Bonds, Accounting for Debts

Question 1

Bonds issued between interest dates are sold how?

Answer 1

Bonds issued between interest dates are sold for their market value plus accrued interest since the last interest payment date.

Question 2

Short term obligations arising from normal course of business are due in customary terms should be classified as? (ASC 405)

Answer 2

Short-term obligations arising from transactions in the normal course of business that are due in customary terms shall be classified as current liabilities.

Question 3

ASC 815 Pronouncement addresses accounting for what?

Answer 3

The pronouncement addresses the accounting for derivative instruments Including certain derivative instruments embedded in other contracts, and hedging activities.

Question 4

What is the entry to record purchase of bonds between interest dates?

Answer 4

The entry to record the purchase on the bonds will include a receivable for the interest “purchased” which will be received when the first interest payment is received.

Question 5

What does the issuance above or below face value reflect?

Answer 5

The issuance of bonds above or below their face value reflects the difference between the market rate of interest and the coupon rate on the date of issuance.

Question 6

A Payment Provision (related to Derivative Instrument)

Answer 6

A payment provision specifies a fixed or determinable settlement to be made if the underlying behaves in a specified manner.

Question 7

ASC 405 requires what information to be disclosed regarding long-term borrowings and capital stock for each of the five years following the latest balance sheet?

Answer 7

a) The combined aggregate amount of maturities and sinking fund requirements for all long-term borrowingsb) The amount of redemption requirements for all issues of capital stock that are redeemable at fixed or determinable prices on fixed or determinable dates, separately by issue or combined.

Question 8

How are gains and losses from debt extinguishment handled by ASC 405

Answer 8

ASC 405 requires that gains or losses from extinguishment mornally be recorded as a part of income from continuing operations

Question 9

In IFRS, how is the term “probable” defined?

Answer 9

Probable is defined as “more likely than not,” which usually defined as a probability of 50% or above.

Question 10

Name three types of derivative instruments

Answer 10

1) Fair value hedges of assets, liabilities, and commitments2) Cash flow hedges3) Foreign currency hedges

Question 11

Issuance of Convertible Debt and Debt with Stock Purchase Warrants (ASC 405)Rule #2. Debt with detachable warrants states what?

Answer 11

The portion of the proceeds of the debt securities issued with detachable stock purchase warrants which is allocable to the warrants should be accounted for as paid-in capital. The allocation should be based on the relative fair market values of the two securities at the time of issuance. Any resulting discount or premium on the debt securities should be accounted for as such.

Question 12

Name some examples of issue cost, and how are they treated on the balance sheet?

Answer 12

Issue costs include all costs of issuing the bond, such as underwriting, account, and legal fees, SEC registration, printing, etc., and represent an asset which is carried on the balance sheet as a deferred charge (ASC 405)

Question 13

ASC 815 Contingency Definition

Answer 13

A situation involving uncertainty as to possible loss that will be resolved when one or more future events occur or fail to occur.

Question 14

Derivatives

Answer 14

Financial device that “derive” their value from other financial instruments.

Question 15

According to ASC 405, a liability is not extinguished by an in-substance defeasance. What are the two reasons when liability is derecognized by the debtor?

Answer 15

Pays the creditor and is relieved of its obligations or is legally released from being the primary obligor.

Question 16

Indenture and Trustee (in relation to Bonds)

Answer 16

The terms of the debt issue are specified in the indenture (contract between issuer and investor) which is policed by a trustee (representative of investors).

Question 17

How are gains and losses on cash flow hedges recognized? (ASC 815)

Answer 17

Gains or losses on cash flow hedges are reported as a component of comprehensive income because the gain or loss on the hedged item will not occur until a future period.

Question 18

What kind of accounting treatment is the issuance of convertible stock and stock with stock purchase warrants given?

Answer 18

The issuance of convertible stock and stock with stock purchase warrants is given the same accounting treatment as convertible debt and debt with stock purchase warrants.

Question 19

What are the two methods of bond premium amortization?

Answer 19

1) The effective interest method (preferable per ASC 405)2) The straight-line method (allowed if not materially different than the interest method).

Question 20

How should short-term obligations be classified? (ASC 405)

Answer 20

Short-term obligations such as trade accounts payable and normal accrued liabilities should always be classified as current.

Question 21

Hybrid instrument.

Answer 21

Derivatives may be freestanding or embedded in a host contract that is itself not a derivative. The combination of a host contract and an embedded derivative is a Hybrid Instrument.

Question 22

Bonds purchased between interest dates are purchased. (hint: cost and interest)

Answer 22

Bonds purchased between interest dates are purchased at cost plus accrued interest since the last interest payment date.

Question 23

How are bonds recorded when issued?

Answer 23

Bonds are recorded as liabilities at their face value when issued.

Question 24

A Notional Amount (related to Derivative Instrument)

Answer 24

A notional amount is a number of currency unit, shares, bushels, pounds, or other units specified in the contract.

Question 25

When warrants are exercised to acquire stock investments, what does the cost include?

Answer 25

When warrants are exercised to acquire stock investments, the cost includes the book value of the warrants surrendered and the amount paid in cash as specified in the warrants.

Question 26

When bonds are redeemed or purchased prior to maturity, the gain or loss is determined how?

Answer 26

When bonds are redeemed or purchased prior to maturity, the gain or loss is determined by the difference between the carrying value of the bonds and the amount given up to acquire the bonds.

Question 27

Major difference between GAAP and IFRS regarding convertible bonds.

Answer 27

The major difference is that convertible bonds are split into an equity piece and a liability portion. The conversion feature is considered a part of equity.

Question 28

Name the two fundamental decisions of ASC 815.

Answer 28

1) Derivative instruments that meet the definition of assets and liabilities should be reported in the financial statements.2) Fair value is the only relevant measure for derivative instruments

Question 29

Issuance of Convertible Debt and Debt With Stock Purchase Warrants (ASC 405)Rule #1. Convertible debt and debt with nondetachable warrants states what?

Answer 29

No portion of the proceeds from the issuance should be accounted for as attributable to the conversion privilege or the nondetachable stock purchase warrants. The debt securities should be recorded as shown previously, with appropriate recognition of any premium or discount.

Question 30

How should the difference between amount paid for a bond and the face value be recorded?

Answer 30

Any difference between the amount paid and the face value should be recorded separately as a Premium or Discount on bonds payable.

Question 31

If the contingency (ASC 815) is probable or likely to occur what two conditions would determine if a contingency loss should be recognized?

Answer 31

1) It is probable that an asset has been impaired or a liability incurred at the balance sheet date, and 2) The amount of loss can be reasonably estimated.

Question 32

Unconditional purchase obligation

Answer 32

The amount which a company is obligated to pay for a contract which calls for the purchase of a minimum quantity of goods at a fixed minimum price.

Question 33

If the bonds are redeemed at a time other than a scheduled interest payment date, how should the accrued interest and bond issue costs be accounted for?

Answer 33

If the bonds are redeemed at a time other than a scheduled interest payment date, the accrued interest, including amortization of bond premium or discount, and the amortization of bond issue cost should be determined and recorded up to the date of redemption or purchase.

Question 34

How are gains and losses on fair value hedges recognized? (ASC 815)

Answer 34

Gains or losses on fair value hedges are recognized in current earnings.

Question 35

Regarding conversion of debt, at the date of conversion, the carrying value of the bonds must be removed from the accounts and the issuance of the new common stock recorded.What are the two methods by which the issuance may be recorded?

Answer 35

1) Record the stock issuance at the fair market value of the stock or bonds, whichever is more clearly evident, recognizing a gain or loss on version as the difference between the carrying value of the bonds and the fair market value of the stock or bonds.2) Record the stock issuance at the carrying value (book value) of the bonds. Upon conversion, if the par value of the stock issued is greater than the book value of the bonds, the excess is recorded as a debt to retained earnings. If the carrying value of the bonds is greater than the par value of the stock issued, the excess is credited to paid-in capital in excess of par.

Question 36

How are issue costs of a bond treated over the life of a bond?

Answer 36

Issue costs are treated separately as deferred charges and amortized over the life of the bond issue. They should not be combined with the discount or used to reduce a premium.

Question 37

GAAP requires that users of financial statements be informed about which three specific areas of operations?

Answer 37

1) Description of the major products and/or services provided by the Company.2) Principle markets and locations of the markets.3) Relative importance of the operations of each (line of) business and the basis for such a determination ( sales, asset commitment, income, etc).

Question 38

Name four examples of Derivatives

Answer 38

Future contracts, forward contracts, interest rate swaps and put options

Question 39

What are the two methods of bonds premium or discount amortization?

Answer 39

1) The effective interest method (ASC 405).2) The straight-line method (allowable if result is not materially different).

Question 40

Bonds

Answer 40

Long-term certificates of indebtedness usually issued in denominations of $1,000 with the market price being quoted in 100’s.

Question 41

An Underlying (related to Derivative Instruments)

Answer 41

An underlying is a specified interest rate, security price, commodity price, foreign exchange rate, index of price or rates, or other variable. An underlying may be a price or rate of an asset or liability but is not the asset or liability itself.

Question 42

What are the two methods by which the investment in stock may be recorded when converting investment securities?

Answer 42

1) Record the new investment at its fair market value, or the fair market value of the converted security, whichever is more clearly evident, recognizing a gain or loss on the conversion at the difference between the carrying value of the converted security and the fair market value used to record the new investment.2) Record the new investment at the carrying value of the security converted, recognizing no gain or loss on the conversion.