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FAR 2014 > Bonds Debt Restructure > Flashcards

Bonds Debt Restructure Flashcards

1
Q

What is a serial bond?

A

Any bond that matures in installments

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2
Q

What is a term bond?

A

Any bond that matures on a single date

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3
Q

What is a debenture bond?

A

A bond not secured by any collateral

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4
Q

What is a sinking fund bond?

A

Cash is held in a sinking fund for repayment of bond at maturity

5 years of requirements and maturity details should be disclosed

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5
Q

What is the formula to calculate proceeds of a bond sale?

A

Present Value of the principal payment at maturity+ Present Value of Interest Payments made
: Market Value of Bond Proceeds

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6
Q

How is the present value of a bond calculated?

A

Step 1: PV of $1 @ Yield Rate (not Stated Rate)
x Bond Face Value

PLUS

Step 2: PV of an Ordinary Annuity of $1 for Term @Yield
x (Stated Rate x Face)

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7
Q

Which costs are included in bond issuance costs? How are they recorded?

A

Include Engraving; Printing; Legal; Underwriter; Registration

Debited to a deferred charge account and amortized over life of Bond using S/L

Bond Proceeds - Bond Issuance Costs : Net Bond Proceeds

Time of amortization begins when issued

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8
Q

How are bonds reported when classified as trading securities?

A

Reported at FMV with unreleased gains and losses being included in earnings

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9
Q

How are bonds amortized under the interest method?

A

Both discount and premium amortization amounts increase each year

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10
Q

Describe the book value method when converting from bonds to stocks.

A

No gain or loss recognized

APIC is the plug for the difference between the Bond’s Book Value and the Par Value of the Common Stock

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11
Q

What is the stated rate for a bond?

A

Rate on the face of the bond

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12
Q

What is the market rate on a bond?

A

Rate that bonds are currently selling for

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13
Q

What happens when the bond’s market rate is greater than the stated rate?

A

Bond will need to sell at a discount in order for buyers to be interested. The difference in market rate vs. the stated is made up by the buyer purchasing the bond for less than par value

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14
Q

What happens when a bond’s market rate is less than the stated rate?

A

Bond will need to sell at a premium in order for buyers to be interested. The difference in market rate vs. the stated is made up by the buyer purchasing the bond for more than par value

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15
Q

How does accrued interest on a bond affect the purchase price?

A

The total cash that seller receives will be MORE than they normally would (set aside any considerations for premium or discount; they are irrelevant for this point).

Basically; the purchaser of the bonds must give the bond issuer the amount of accrued interest up front.

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16
Q

When does interest expense start accruing on a bond?

A

When the bonds are issued

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17
Q

How is an interest payment on a bond calculated?

A

Cash for payment : Stated rate x Face amount

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18
Q

What amount of interest is expensed on a bond interest payment?

A

Interest expense : effective yield x carrying value

Any difference between expense and cash payment is applied as amortization against premium/discount

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19
Q

What are convertible bonds? Which recording method is used?

A

Bonds that can be converted to stock

Book value method used if no gain or loss

Market value method used if there is a gain or loss

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20
Q

How is the retirement of bonds recorded?

A

Gain or Loss is Ordinary

Extraordinary if both unusual and infrequent

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21
Q

When is a gain recognized in a debt restructuring?

A

If terms are modified; and future payments are now less than the carrying amount of the debt; then a Gain is recognized

22
Q

What is the gain recognized under a settlement of debt?

A

Gain recognized:

Difference between cash paid and carrying amount of debt

Difference between non-cash asset given and re-valued at FMV and debt carrying amount

23
Q

For a creditor; how is a loan impairment recorded?

A

If future cash flows discounted at loan’s Effective Interest Rate are less than Carrying Value:

Effective Rate calculated using original rate; not modified rate

24
Q

When are future value and present value used

A

Future value with payments

Present value with cost

25
Q

How is the future value of discounts on purchases recorded

A

At present value in deferred charges account

26
Q

How should receivables bearing an unusual rate of interest be recorded? Exceptions?

A

Recorded at present value unless maturity is under 1 year, then record at face value

27
Q

Calculate interest over life of loan

A

Cash received - cash paid ( at PV)

28
Q

What is a discount on notes payable

A

A liability valuation account shown as a direct reduction from face amount of note (contra account)

29
Q

What is a premium on note payable

A

Reported as addition to face amount of note

30
Q

How are indirect loan origination fees treated

A

Expensed as incurred

31
Q

Calculate interest expense under fair value method

A

Interest expense = market rate x face amount of note

32
Q

Treatment of bond discounts and premiums under fair value method

A

No bond premiums or discounts

33
Q

Calculate net proceeds

A

Market value of bond - bond issuance costs

34
Q

Treatment and examples of bond issuance costs

A

S/L amortization over term

Engraving and printing
Legal and accounting
Commissions
Promotional costs

35
Q

Disclosure requirements when bonds elected at fair value

A

FV of bond and principal obligation value must be disclosed

36
Q

Calculate gain/loss on bond under the fair value method

A

Fair value - carrying value

37
Q

Calculate adjustments to bonds payable for amortization

A

Beg bonds payable + (interest expense - interest payable)

38
Q

How does bond amortization change from year to year for premium as discounts

A

Amortization amount increases year to year for both premium and discounts

39
Q

What are the disclosures for sinking funds

A

Combined aggregate of maturities and sinking fund requirements detailed by year

40
Q

Treatment of debt and equity securities classified as trading

A

Record at fair value with unrecognized Gain and loss to earnings

41
Q

Calculate gain on sale of bond

A

Selling price - carrying value

42
Q

How to record conversion of bonds using book value method

A

Carrying amount of converted bonds - conversion expense

43
Q

Under market vale method when is loss recorded on conversion of bond

A

When market value of stock is greater than book value of bonds

44
Q

How to treat proceeds of bonds with detachable warrants

A

Allocate proceeds between bonds and warrants based on fair value

45
Q

Calculate gain or loss on bond redemption

A

Cash paid - net book value of bonds

Net book value = face value - issue costs - premium or + discount)

46
Q

How to record bonds under IFRS

A

Amortized cost or fair value through profit and loss

47
Q

How to record convertible bonds under IFRS

A

Separated into debt and equity components with liability component at fair value and residual assigned to equity component

48
Q

How to determine debt restructuring gain wen only terms are modified

A

Compare future cash payments to CV to determine gain

49
Q

When and how to record bad debt in debt restructure

A

If PV is less than CV, bad debt expense is recorded
Write off accrued interest receivable
Reduce principal balance
DR bad debt
CR loan receivable, accrued interest receivable, valuation allowance

50
Q

Rate issued for debt restructuring expected future cash flows

A

Use original effective rate

FAR 2014 (19 decks)

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