Chapter 13 Flashcards
What are bond contracts know as
bond indentures
what is a bond indenture
a promise to pay a sum of money at designated maturity date, plus interest
what is the typical face value of a bond
$1000
What is a secured bond
a bond that is backed by a pledge of some sort of collateral
what is an unsecured bond
bond not backed by collateral
*usually have very high interest rates
What is a term bond
a bond that matures on a single date
What is a serial bond
a bond that matures in installments
What is a callable bond
a bond that can be redeemed before maturity
what is a convertible bond
a bond that is convertible to other things, usually stock
What is a deep discount/zero interest bond
bonds that don’t have interest but are sold at a discount
What is a revenue bond
a bond where interest is paid from a specified revenue source
what is an income bond
a bond that pays no interest unless the issuing company is profitable
What is the stated (coupon or nominal rate)
the rate written in the terms of the bond and the amount of interest that will be paid off
what is a market (effective or yeild) rate
this is the prevailing interest rate for similar bonds in the market
What are the factors that affect the selling price of the bond
- supply and demand
-relative risk
-market conditions and economy
what happens if stated rate < market
discount
what happens if stated rate > market
premium
How is the selling price of a bond calculated
determining present value of its expected future cash flows
how do you calculate the bond interest payment
FV X Stated
how do you calculate the bond interest expense
carrying value X market rate
the difference between interest payment and interest expense is?
amortization amount
what is it called when a company pays bond off before maturity
extinguishment of debt
what is the amount paid to buy back the bond called
reacquisition price
when is there a gain on the extinguishment of debt
net carrying > requisition price
when is there a loss on estinguishment
when the net carrying amount is less than reacquisition price
What happens when a note is issued at zero bearing interest
the discount is amortized to interest expense over the life of the note
what is the journal entry to ammortize discount for a zero interest bearing note
interest expense
discount on note payable
What is a mortgage note payable
a note that pledges title to property if not payed
what is the journal entry for mortgage installment
note payable
cash
interest expense
discount on notes payable
What is troubled debt restructuring
occurs when the creditors grant concession to the debtor
*usually because debtor cant pay
What are the two types of debt restructure
1.) settlement of debt at less than the carrying amount
2.) modification of terms
What can settlement of debt involve
- transfer of non-cash asset
- issuance of the debtors stock
how would a creditor journalize the settlement of debt - asset exchange
asset gained
AFDA
Note Receivable
how would a debtor journalize the settlement of debt - asset exchange
Note Payable
Loss on Asset
Gain on Restructuring
Asset
How would a creditor journalize a settlement of debt - equity interest
Equity Investment
AFDA
Note Receivable
how would a debtor journalize a settlement of debt - equity interest
Note Payable
Common Stock
PIC
Gain on Restructuring
What are the possible modifications of terms a creditor can grant a debtor
1.) reduction of the stated rate
2.) extension of maturity date
3.) reduction of face amount
4.) reduction or deferral of any accrued interest
When does a debtor recognize a gain due to a modification of terms
When FCF are greater than Carrying Balance
