Bonds and Debt Restructure

Question 1

What is the key effect of reducing the bond’s carrying amount?

Answer 1

It increases the effective interest rate.

Question 2

What are convertible bonds?

Answer 2

Bonds that are convertible to stock

Question 3

What are the two methods for convertible bonds?

Answer 3

The book value method and the market method.

Question 4

For bond amortization via the interest method, should the bond discount and premium amortization amounts increase, decrease, or a mix of both?

Answer 4

They should BOTH increase each year.

Question 5

Are gains/losses on bond retirements considered ordinary/extraordinary or something else?

Answer 5

Gains/losses are considered ordinary.

Question 6

When can a bond retirement be considered extraordinary?

Answer 6

When it is BOTH unusual and infrequent.

Question 7

When can a bond retirement be considered extraordinary?

Answer 7

When it is BOTH unusual and infrequent.

Question 8

What does a debt restructure look like from the debtor’s perspective and how is it treated?

Answer 8

Modification of terms. Future payments are now less than the carrying amount of debt. Gain recognized.

Question 9

What does a debt restructure look like from the creditor’s perspective and how is it treated?

Answer 9

Loan impairment. Future cash flows discounted at loan’s effective interest rate < carrying value

Question 10

What happens during a settlement?

Answer 10

Gain is recognized by debtor, cash paid - carrying amount = gain. Same thing for if a non-cash asset is used rather than cash.

Question 11

When is straight line amortization used?

Answer 11

It is NOT used. It is not GAAP.

Question 12

What method is used for bond amortization?

Answer 12

Effective Interest Method of amortization.

Question 13

What are serial bonds?

Answer 13

Bond that mature in installments.

Question 14

What are term bonds?

Answer 14

Bond that matures on a single date

Question 15

What are debenture bonds?

Answer 15

Unsecured bond

Question 16

What is a sinking fund bond?

Answer 16

Cash held for bond repayment; 5 year disclosures required for these types.

Question 17

What is the bonds proceeds formula?

Answer 17

Market value of bond proceeds = present value of the principal payment at maturity + present value of interest payments made

Question 18

What are bond issuance costs?

Answer 18

Third party debt issuance costs such as engraving, printing, legal, underwriting, registration, etc.

Question 19

How do third part debt issuance costs affect the carrying amount of a bond liability?

Answer 19

It reduces the carrying amount of the liability.

Question 20

What disclosures are required for bond issuance costs?

Answer 20

Same as a change in accounting principle; retrospective treatment required for all prior periods presented.

Question 21

How are bonds classified as trading securities reported?

Answer 21

They are reported at fair market value with unrealized gains and losses going to earnings.

Question 22

What is the stated rate of a bond?

Answer 22

Rate on the face of the bond?

Question 23

What is the market (yield) rate of a bond?

Answer 23

Rate that bonds are currently selling for.

Question 24

What happens when market (yield) rate > stated rate?

Answer 24

Bonds sold at discount

Question 25

What happens when market (yield) rate < stated rate?

Answer 25

Bonds sold at premium.

Question 26

How is bond interest treated when a bond is issued between interest dates?

Answer 26

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.

Question 27

When does interest expense start accruing?

Answer 27

It begins accruing when the bonds are issued.

Question 28

How is interest paid calculated?

Answer 28

Stated rate x face amount.

Question 29

How is interest expense calculated?

Answer 29

Effective yield x carrying value