Bonds and Debt Restructure Flashcards
What is the key effect of reducing the bond’s carrying amount?
It increases the effective interest rate.
What are convertible bonds?
Bonds that are convertible to stock
What are the two methods for convertible bonds?
The book value method and the market method.
For bond amortization via the interest method, should the bond discount and premium amortization amounts increase, decrease, or a mix of both?
They should BOTH increase each year.
Are gains/losses on bond retirements considered ordinary/extraordinary or something else?
Gains/losses are considered ordinary.
When can a bond retirement be considered extraordinary?
When it is BOTH unusual and infrequent.
When can a bond retirement be considered extraordinary?
When it is BOTH unusual and infrequent.
What does a debt restructure look like from the debtor’s perspective and how is it treated?
Modification of terms. Future payments are now less than the carrying amount of debt. Gain recognized.
What does a debt restructure look like from the creditor’s perspective and how is it treated?
Loan impairment. Future cash flows discounted at loan’s effective interest rate < carrying value
What happens during a settlement?
Gain is recognized by debtor, cash paid - carrying amount = gain. Same thing for if a non-cash asset is used rather than cash.
When is straight line amortization used?
It is NOT used. It is not GAAP.
What method is used for bond amortization?
Effective Interest Method of amortization.
What are serial bonds?
Bond that mature in installments.
What are term bonds?
Bond that matures on a single date
What are debenture bonds?
Unsecured bond
What is a sinking fund bond?
Cash held for bond repayment; 5 year disclosures required for these types.
What is the bonds proceeds formula?
Market value of bond proceeds = present value of the principal payment at maturity + present value of interest payments made
What are bond issuance costs?
Third party debt issuance costs such as engraving, printing, legal, underwriting, registration, etc.
How do third part debt issuance costs affect the carrying amount of a bond liability?
It reduces the carrying amount of the liability.
What disclosures are required for bond issuance costs?
Same as a change in accounting principle; retrospective treatment required for all prior periods presented.
How are bonds classified as trading securities reported?
They are reported at fair market value with unrealized gains and losses going to earnings.
What is the stated rate of a bond?
Rate on the face of the bond?
What is the market (yield) rate of a bond?
Rate that bonds are currently selling for.
What happens when market (yield) rate > stated rate?
Bonds sold at discount
What happens when market (yield) rate < stated rate?
Bonds sold at premium.
How is bond interest treated when a bond is issued between interest dates?
Buyer must give bond issuer that amount of accrued interest up front. Buyer will receive full interest on interest date but only be owed partial amount so they pay the difference up front.
When does interest expense start accruing?
It begins accruing when the bonds are issued.
How is interest paid calculated?
Stated rate x face amount.
How is interest expense calculated?
Effective yield x carrying value
