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CPA FAR > Bonds Debt Restructure > Flashcards

Bonds Debt Restructure Flashcards

2
Q

Next

What is a serial bond?

A

Any bond that matures in installments

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3
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What is a term bond?

A

Any bond that matures on a single date

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4
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What is a debenture bond?

A

A bond not secured by any collateral

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5
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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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6
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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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7
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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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8
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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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9
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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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10
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How are bonds amortized under the interest method?

A

Both discount and premium amortization amounts increase each year

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11
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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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12
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What is the stated rate for a bond?

A

Rate on the face of the bond

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13
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What is the market rate on a bond?

A

Rate that bonds are currently selling for

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14
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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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15
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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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16
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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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17
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When does interest expense start accruing on a bond?

A

When the bonds are issued

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How is an interest payment on a bond calculated?

A

Cash for payment = Stated rate x Face amount

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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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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

21
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How is the retirement of bonds recorded?

A

Gain or Loss is Ordinary

Extraordinary if both unusual and infrequent

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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

23
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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

24
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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

CPA FAR (21 decks)

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