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