Bonds/ Troubled Debt Restructure Flashcards

Question

Bond Redemption: Example: 8% 1,000,000 face 10% yield rate carrying value 1/01/04 940,000 redeemed at 6/30/04 for 102 after paying interest Compute gain/loss

Answer 1

1. compute carrying value up to redemption date 2. compute discount/premium amortization 3. carrying value - cash paid to redeem = gain/loss 940,000 x 10% x 1/2 47,000 1000,000 x 8% x 1/2 _40,000_ Discount amort 7,000 carrying value 940,000 plus discount _ 7,000_ total 947,000 less;cash paid _1,020,000_ loss 73,000

Answer 2

1. Compute effective interest up to sale date 2. compute stated interest up to sale date 3. difference is the premium/discount amort 4. Add/Deduct from carrying value before sale to get the updated carrying value 5. compute gain or loss = CV - cash received or paid

Answer 3

_{Carrying value > sum of future payments (undiscounted)} _Principal _{+ Interest payable balance} _{= Total amount due} _{Less: Future payments: principal + interest (undiscounted)} _{=Gain on restructuring} _{Notes Payable} _{Interest payable (condoned)} _{Notes Payable (new principal)} _{Gain on restructuring} _{NOTE: FUTURE INTEREST PAYABLE IS NOT PART OF THE JOURNAL ENTRY}

Answer 4

^{1. write up asset to FV} ^{Asset xx} ^{Gain on transfer xx} ^{2. Compute gain/loss} ^{Notes Payable} ^{Interest Payable} ^{Notes Payable (new)} ^{Asset (at FV) Gain on settlement of debt} ^{Computation of gain/loss: CV > Restructuring gain/loss} ^{FV > Transfer gain/loss} ^BV

Answer 5

_Record stocks at FV_ Notes Payable Interest Payable CS (at par) APIC - CS Gain on settlement of debt

Answer 6

^{Bad debts (impairment loss)} ^{Notes receivable} ^{Interest receivable} ^{Valuation allowance} ^{** set up amortization sched - effective interest method} ^{** valuation allowance is the premium/discount} ^{** interest/cash received = new principal x new rate} ^{**interest revenue = new CV x old rate}

Answer 7

Impairment loss Less: Principal forgiven Interest forgiven = Valuation allowance _Journal entry:_ Cash (interest received) new principal x new rate Valuation allowance - plug Interest revenue/Bad debts expense ( new carrying value x old rate)

Answer 8

Impairment loss: Original principal amount - PV of future payments (see below) = Impairment loss (to bad debts) Present value of future payments: Present value of new principal (NP x PV OR) Interest (NP x NRate) x PV OR = PV of future payments/ new carrying amount PRACTICE SAMPLE PROBLEM IN THICK NOTEBOOK!!!

Answer 9

No value is apportioned to conversion feature JE like a regular bond Cash Discount Bonds Payable Premium

Answer 10

Cash Discount Bonds payable (always at face) APIC - warrants CASH PROCEEDS allocated between the debt and warrants using relative fair values ratio AT ISSUE DATE 1. If both fv's at issuedate are given, calculate amounts based on both fv's 2. value of warrants - to APIC - warrants 3. NON DETACHABLE warrants - NO ALLOCATION IS PREMITTED 4. if only the FV of the stocks is given: Market price per bond Less: Option price per bond = FV per share of warrants X # of shares = FV of warrants 5. If only the FV of warrants is given, that value is multiplied by the # of option shares; deduct this amount from the cash proceeds to get the value of the bonds If only one fv is known, the other is a plug 6. Credit value of warrants to APIC -warrants

Answer 11

Cash (option price) Paid in capital (reverse balance) or per share amt Common stock - AT PAR Paid in excess - plug Record cash received at option price Upon expiration: Close the APIC account

Answer 12

is considered extinguished whenever the debtor pays the creditor and is relieved of all obligations relating to the debt 1. calling a bond 2. refunding - replace with new debt 3. legal relief judicially or by the creditor WHEREAS IN IFRS, Modification of debt, exchange of original liability with a new financial liability with substantially different terms are considered extinguishment Then a new financial liability is recognized

Answer 13

Loss Bonds payable Premium Discount Unamortized BIC Cash

Answer 14

1. the restructuring constitutes a concession 2. debtor is experiencing financial difficulties

Answer 15

Revalue the debt at fair value and the resulting gain or loss is recognized in current earnings.

Answer 16

PRACTICE PROBLEMS

Answer 17

Combined aggregate amount of maturities and sinking fund requirements for all long term borrowings for EACH OF THE NEXT 5 YEARS AND IN THE AGGREGATE

Answer 18

Interest income/expense is the sum of the straight line premium/discount amortization plus cash received or paid cash paid/received = face x stated rate + SL discount/premium = interest expense/income REMEMBER, DO NOT COMPUTE INTEREST EXPENSE/REVENUE FROM THE CARRYING AMOUNT. THIS IS THE EFFECTIVE INTEREST METHOD! IN STRAIGHT LINE, YOU DO NOT USE THE EFFECTIVE INTEREST RATE IN THE COMPUTATION!

Answer 19

Pr Im Present ImpPresentIk[pai