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IV. Bonds & Debt Restructure > Bonds & Debt Restructure > Flashcards

Bonds & Debt Restructure Flashcards

1
Q

Serial Bond

A
  • Matures in Installments
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2
Q

Term Bond

A
  • Matures on a Single Date
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3
Q

Debenture Bond

A
  • Unsecured
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4
Q

Sinking Fund Bonds

A
  • Cash Held for Bond Repayment
  • 5 years of Disclosures
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5
Q

Bond Proceeds Formula

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

Present Value of a Bond formula

A

Step 1. PV of $1 @Yield Rate (not Stated Rate)

x Bond Face Value

PLUS

Step 2. PV of an Ord. Annuity of $1 for Term @Yield

x (Stated Rate x Face)

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7
Q

Present Value of a Bond Example

Face Amount: $1,000

Stated Interest Rate: 6%

Yield interest rate 9%

Bond Term: 10 periods

PV $1 for 10 periods @ 6% = .558

PV $1 for 10 periods @ 9% = .422

PV of an OA of $1 @ 9% for 10 periods = 6.418

A
  • *IGNORE STATE Rate until step 2

Step 1: $1,000 x .422= $422

Step 2: $1,000 x 6% = $60(Ony time state rate)

$60 x 6.418= $385

Carrying amount of bond= $422 + $385= $807

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8
Q

Third Part Debt Issuance Costs

A
  • Engraving
  • printing
  • legal
  • underwriting
  • registration
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9
Q

Bond Issuance Costs Reduces:

A
  • Carrying Amount of Liability
    • KEY: INCREASES EFFECTIVE INTEREST RATE
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10
Q

Bond Issuance Costs Disclosures:

A
  • Same as a Change in Accounting Principle
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11
Q

Bond Issuance costs uses what treatment?

A
  • Retrospective Treatment to all prior periods presented in the financial statements
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12
Q

Bonds Classifed as Trading Securities are Reported:

A
  • at FMV with unrealized gains and losses being included in earnings
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13
Q

Bond Amortization Interest Method

A
  • Both discount and premium amortization amounts increase each year
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14
Q

Bond to Stocks: Book Value Method

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 CS
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15
Q

Bond to Stock: Book Value Method Journal entry

A

Bond Payable 1,000,000

Bond Premium 300,000

Common Stock (Par) 50,000

APIC (plug) 1,250,000

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16
Q

Stated Rate

A
  • Rate on the face of the bond
17
Q

Market Rate

A
  • Rate that bonds are currently sellling for
18
Q

If Martket Rate > Stated Rate?

A
  • Bond will need to sell at a discount for buyers to be interested
  • difference in market rate vs stated is made up by the buyer purchasing the bond for lesss than par value
  • Market Rate: 12%
  • Stated Rate: 10%
  • Par Value: $100
  • Purchase Price: $98
19
Q

If Market Rate < Stated Rate?

A
  • Bond will need to sell at Premium
  • difference in market rate vs stated is made up by the buyer purchasing the bond for more than par value
  • Market Rate: 8%
  • Stated Rate: 10%
  • Par Value: $100
  • Purchase Price: $102
20
Q

Bond Issuance ON interest Date entry

A
  • Dr. Cash 102
    • Cr. Premium . 2
    • Cr. Bond Payable 100
  • Dr. Cash 98
  • Dr. Discount 2
    • Cr. Bond Payable 100
21
Q

Bond issuance BETWEEN interest date

A
  • Dr. Cash 102 Dr. Cash 98
  • Dr. Cash Interest* Dr. Cash Interest*
    • Cr. Premium 2 Dr. Discount 2
    • Cr. Bond Payable 100 Cr. Bond Payable 100
    • Cr. Interest Payable Cr. Interest Payable *

* Face x Stated Rate x Interest Accrued since last date

22
Q

If a company issues bonds BETWEEN interest dates, then the total cash that they recieve will be

A
  • MORE than they normally would (set asied any considerations for premium or discount, they are irrelevant at this point
23
Q

Purchaser of the bonds must give the bond issuer the amount of accrued interest up front. Why?

A
  • Because if the bonds are issued on March 1, and the next interest payment date is July 1, then when the buyer of the bonds gets the full interest payment on July 1, it will be for the full six months (Face x Stated Rate)
  • buyer getting money wasnt earned in July, then the buyer essentially pays them back for those two months up front
24
Q

Issues Bonds between interest date example:

$100,000 Bonds

10% Stated Rate

Sold at Par on March 1

January 1 & July 1 interest dates

A

100,000 x 2/12 x 10% = $1,667

Cash $101,667

Bonds Payable $100,000

Interest Expense $1,667 (credit)

25
Q

Interest expense

A
  • Starts accruing when the bonds are issued - not with the face amount of the bonds
  • Journal entry:
    • amount of cash that is credited for the payment = Stated rate x Face amount
    • the amount of Interest Expense debited is effective Yield x Carrying Value
26
Q

Interest Paid vs. Interest Expense

A
  • Interest Paid depends on the amount/rate on the bond - it has nothing to do with Premiums or Discounts
  • Interest Expense depends on the carrying amount [(Bond amount +/- Premium or Discount), Minus amortization)] x Effective (Market) Interest Rate

IV. Bonds & Debt Restructure (1 decks)

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