Bonds Debt Restructure

Question 2

FAR

What is a serial bond?

Answer 2

Any bond that matures in installments

Question 3

FAR

What is a term bond?

Answer 3

Any bond that matures on a single date

Question 4

FAR

What is a debenture bond?

Answer 4

A bond not secured by any collateral

Question 5

FAR

What is a sinking fund bond?

Answer 5

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

5 years of requirements and maturity details should be disclosed

Question 6

FAR

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

Answer 6

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

Question 7

FAR

How is the present value of a bond calculated?

Answer 7

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)

Question 8

FAR

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

Answer 8

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

Question 9

FAR

How are bonds reported when classified as trading securities?

Answer 9

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

Question 10

FAR

How are bonds amortized under the interest method?

Answer 10

Both discount and premium amortization amounts increase each year

Question 11

FAR

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

Answer 11

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

Question 12

FAR

What is the stated rate for a bond?

Answer 12

Rate on the face of the bond

Question 13

FAR

What is the market rate on a bond?

Answer 13

Rate that bonds are currently selling for

Question 14

FAR

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

Answer 14

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

Question 15

FAR

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

Answer 15

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

Question 16

FAR

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

Answer 16

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.

Question 17

FAR

When does interest expense start accruing on a bond?

Answer 17

When the bonds are issued

Question 18

FAR

How is an interest payment on a bond calculated?

Answer 18

Cash for payment = Stated rate x Face amount

Question 19

FAR

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

Answer 19

Interest expense = effective yield x carrying value

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

Question 20

FAR

What are convertible bonds? Which recording method is used?

Answer 20

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

Question 21

FAR

How is the retirement of bonds recorded?

Answer 21

Gain or Loss is Ordinary

Extraordinary if both unusual and infrequent

Question 22

FAR

When is a gain recognized in a debt restructuring?

Answer 22

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

Question 23

FAR

What is the gain recognized under a settlement of debt?

Answer 23

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

Question 24

FAR

For a creditor; how is a loan impairment recorded?

Answer 24

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