Chapter 11: Noncurrent Liabilities

Question 1

What is the carrying amount of debt?

Answer 1

Face amount [+ any unamortized premium] or [- any unamortized discount] and [- any unamortized debt issue costs]
Unamortized is the remaining amortization needed

Question 2

To solve for the PV for a lump sum, what is needed?

Answer 2

Rate: market or implicit or incremental borrowing rate per interest period
Term: number of interest periods
Future value: Given
PV = FV÷(1+r)^t

Question 3

What is the difference between annuities due and ordinary annuities?

Answer 3

Ordinary annuities are paid at the end of the year compared to annuities due which is due at the beginning.

Question 4

When there is a stated rate and a market rate, which is used to calculate the discounted rate?

Answer 4

The market rate, once interest payments are determined with the stated rate.

Question 5

To solve for the FV for a lump sum, what is needed?

Answer 5

Rate, Number of periods, PV
FV= PV x (1+r)^t

Question 6

For bond issuance, what is the difference between the stated rate and the market rate?

Answer 6

The stated rate is the interest rate as stated on the bond while the market rate is the interest rate prevailing in the market

Question 7

When cash proceeds are greater than the face amount of the bond what does that mean about the stated vs market rate?

Answer 7

That the stated rate is greater than the market rate

Question 8

What is the normal balance for discount on bonds payable?

Answer 8

Debit, contra-liability to the bonds payable

Question 9

What is the effective interest rate?

Answer 9

The market interest rate on the date the bond was sold

Question 10

How is the annual interest expense calculated?

Answer 10

Cash interest paid + Effect of the amortization of premium or discount

Question 11

What are the steps to the Effective-Interest Method?

Answer 11

1. Calculate the cash interest payment
   Face value of bond x Stated interest rate
2. Calculate the interest expense
   Carrying value of bond x Effective interest rate (market)
3. Amortization = Difference Between 1 & 2

Question 12

When debt is issued with detachable warrants what happens with the proceeds?

Answer 12

The proceeds must be allocated between debt and warrants

Question 13

What does the JE to record the exercise of warrants on a bond?

Answer 13

First record JE for Bond payable
(DB) Cash
(DB) Paid-in capital - warrants
(CR) Common stock
(CR) Additional paid-in capital

Question 14

Why would a company want to retire debt early?

Answer 14

Interest rates have fallen and they no longer want to pay the higher interest rates on old loans.

Question 15

If the carrying value is less than the reacquisition price what is needed to record the JE?

Answer 15

A loss on extinguishment

Question 16

What is the JE for a Settlement in Full with a Transfer of Assets? (from creditor side)

Answer 16

(DB) Asset
(DB) Loss on settlement
(DB) Allow for credit losses
(CR) Receivable

Question 17

When debt is issued with detachable warrants, what happens to the proceeds?

Answer 17

The proceeds are allocated between the bonds and the detachable stock warrants based on their relative fair values.

Question 18

Under the cost method for treasury stock, what is the net effect on the equity?

Answer 18

Contributions received ordinarily are recorded as revenues or gains when received. However, adjustments or charges or credits resulting from transactions in the entity’s own stock are excluded from net income or the results of operations. Thus, the receipt of a contribution of a company’s own stock is recorded at fair value as increases in both contributed capital and treasury stock. Because these accounts offset, the net effect on equity is $0.

Question 19

What is the PV formula?

Answer 19

PV = FV÷(1+r)^t

Question 20

What is the FV formula?

Answer 20

FV = PV x (1+r)^t

Question 21

What is the carrying amount of debt equal to?

Answer 21

the face amount (1) plus any unamortized premium or minus any unamortized discount and (2) minus any unamortized debt issue costs.

Question 22

When can a debtor de-recognize the liability?

Answer 22

Only if it has been extinguished.
Extinguishment results only if
(1) the debtor pays the creditor and is relieved of its obligation with respect to the liability, or
(2) the debtor is legally released from being the primary obligor, either judicially or by the creditor.

Question 23

What are serial bonds?

Answer 23

Bonds that mature at various dates.

Question 24

What are term bonds?

Answer 24

Bonds that mature on a single date