Bonds & Debt Restructuring

Question 1

What is a serial bond?

Answer 1

Any bond that matures in installments

Question 2

What is a term bond?

Answer 2

Any bond that matures on a single date

Question 3

What is a debenture bond?

Answer 3

A bond not secured by any collateral

Question 4

What is a sinking fund bond?

Answer 4

Cash is held in a sinking fund for repayment of bond at maturity - 5 years of requirements and maturity details should be disclosed

Question 5

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

Answer 5

PV of Principal Payment at Maturity
+ PV of Interest Payments Made
= Market Value of Bond Proceeds

Question 6

How is the present value of a bond calculated?

Answer 6

Step 1: PV of $1 @ Yield Rate (not Stated Rate) x Bond Face Value +
Step 2: PV of an Ordinary Annuity of $1 for Term @ Yield x (Stated Rate x Face)

Question 7

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

Answer 7

Include: engraving, printing, legal, underwriter, registration
dr 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 8

How are bonds reported when classified as trading securities?

Answer 8

Reported at FMV with unreleased G/L being included in earnings

Question 9

How are bonds amortized under the interest method?

Answer 9

Both discount and premium amortization amounts increase each year

Question 10

What is the stated rate for a bond?

Answer 10

Rate on the face of the Bond

Question 11

Describe the Book Value Methods when converting from bonds to stocks

Answer 11

No G/L recognized. APIC is the plug for the difference between the Bond’s BV and the Par Value of the Common Stock

Question 12

What is the market rate on a bond?

Answer 12

Rate that bonds are currently selling for

Question 13

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

Answer 13

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

Question 14

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

Answer 14

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

Question 15

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

Answer 15

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 16

When does interest expense start accruing on a bond?

Answer 16

When the bonds are issued

Question 17

How is an interest payment on a bond calculated?

Answer 17

Cash for payment = Stated rate x face amount

Question 18

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

Answer 18

Interest expense = Effective Yield x Carrying Value.

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

Question 19

What are convertible bonds? Which recording method is used?

Answer 19

Bonds that can be converted to stock - Book Value Method is used if no G/L. Market Value Method used if there is a G/L

Question 20

How is the retirement of bonds recorded?

Answer 20

G/L is Ordinary. Extraordinary if both unusual and infrequent.

Question 21

When is a gain recognized in a debt restructuring?

Answer 21

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

Question 22

What is the gain recognized under a settlement of debt?

Answer 22

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 23

For a creditor, how is a loan impairment recorded?

Answer 23

If future cash flows discounted at loan’s Effective Interest Rate are less than Carrying Value: ER calculated using original rate - not modified rate