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Financial > 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

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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

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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

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24
Q

What are the two methods of bond premium or discount amortization? (L)

A

1) The effective interest method (ASC 405).

2) The straight-line method (allowable if result is not materially different).

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25
Q

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

A

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

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26
Q

Indenture and Trustee (in relation to Bonds) (L)

A

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).

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27
Q

Name the two fundamental decisions of ASC 815. (L)

A

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.

28
Q

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

A

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

29
Q

How are bonds recorded when issued? (L)

A

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

30
Q

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

A

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

31
Q

Issuance of Convertible Debt and Debt With Stock Purchase Warrants (ASC 405)

Rule #2. Debt with detachable warrants states what? (L)

A

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.

32
Q

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

A

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

33
Q

An Underlying (related to Derivative Instruments) (L)

A

An underlying is a specified interest rate, security price, commodity price, foreign exchange rate, index of prices 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.

34
Q

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

A

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.

35
Q

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

A

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

36
Q

A Payment Provision (related to Derivative Instruments. (L)

A

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

37
Q

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

A

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

38
Q

Bonds issued between interest dates are sold how? (L)

A

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

39
Q

ASC 815 Contingency Definition (L)

A

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

40
Q

Unconditional purchase obligation (L)

A

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.

41
Q

How are gains and losses from debt extinguishment handled by ASC 405? (L)

A

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

42
Q

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

A

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

43
Q

Name four examples of Derivatives (L)

A

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

44
Q

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

A

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

45
Q

Major difference between GAAP and IFRS regarding convertible bonds. (L)

A

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..

46
Q

ASC 815 Pronouncement addresses accounting for what? (L)

A

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

47
Q

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

A

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

48
Q

Bonds (L)

A

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

49
Q

Name three types of derivative instruments. (L)

A

1) Fair value hedges of assets, liabilities & commitments.
2) Cash flow hedges.
3) Foreign currency hedges.

50
Q

Issuance of Convertible Debt and Debt With Stock Purchase Warrants (ASC 405)

Rule #1. Convertible debt and debt with nondetachable warrants states what? (L)

A

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.

51
Q

What does the issuance above or below face value reflect? (L)

A

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

52
Q

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

A

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.

53
Q

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? (L)

A

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 conversion 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 debit 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.

54
Q

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

A

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

55
Q

A Notional Amount (related to Derivative Instruments) (L)

A

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

56
Q

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

A

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.

57
Q

What are the two methods of bond premium amortization? (L)

A

1) The effective interest method (preferable per ASC 405).

2) The straight-line method (allowed if not materially different than the interest method).

58
Q

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

A

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.

59
Q

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? (L)

A

(a) The combined aggregate amount of maturities and sinking fund requirements for all long-term borrowings.
(b) 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.

60
Q

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

A

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.

61
Q

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

A

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.)

62
Q

Derivatives (L)

A

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

63
Q

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? (L)

A

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 costs should be determined and recorded up to the date of redemption or purchase.

64
Q

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

A

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

65
Q

Hybrid instrument. (L)

A

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.

Financial (26 decks)

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