Chapter 14: Long-Term Liabilities

Question 1

What are the general characteristics of Bonds?

Answer 1

1. promise to pay a stated amount at a specified maturity date
2. required periodic interest as a stated percentage of face
3. represent a liability to the company that issues the bonds (issuer) and an asset to the company that purchases the bonds (investor)

Question 2

How are bonds sold?

Answer 2

bonds sell at price plus accrued interest

Question 3

The price of a bond is what?

Answer 3

the present value of total cash flows (principle and interest) using the market rate

Question 4

Bonds are typically stated in terms of a ___ of ___.

Answer 4

percentage / face value

Question 5

market rate = stated rate

Answer 5

bond is issued at face value

Question 6

market rate > stated rate

Answer 6

bond is issued at discount

Question 7

market rate < stated rate

Answer 7

bond is issued at premium

Question 8

How are bonds reported?

Answer 8

carrying value

Question 9

bond discounts are recored as _____ to bonds payable and investment in bonds

Answer 9

contra accounts

Question 10

bond premiums represent adjunct accounts which ___ bonds payable and investment in bonds

Answer 10

increase

Question 11

How is carrying value calculated?

Answer 11

Face - discount + premium

Question 12

___ decreases the value of a bond.

Answer 12

discounts

Question 13

___ increases the value of a bond

Answer 13

premiums

Question 14

How is interest expense calculated in the effective interest method?

Answer 14

carrying value * market rate

Question 15

How is the coupon payment calculated in the effective interest method?

Answer 15

face value * stated rate

Question 16

In the effective interest method, the difference is reflected as…

Answer 16

amortization of discount or premium

Question 17

What type of method has equal portions of discount/premium amortization each interest period?

Answer 17

straight line method

Question 18

How is the coupon payment calculated in the straight line method?

Answer 18

face value * stated rate

Question 19

How is the difference of discount/premium and the coupon payment recorded in the straight line method?

Answer 19

interest expense

Question 20

Which method results in the same amount of interest of total interest expense over the life of the bond?

Answer 20

both methods

Question 21

If an accounting period ends between interest dates, interest should be ____.

Answer 21

accrued

Question 22

Type of costs that are capitalized as an asset and amortized to expense over the term to maturity of the bond. These type of costs include legal and accounting fees, printing fees, registration and underwriting fees.

Answer 22

debit issue costs

Question 23

What are the three Off-Balance Sheet Financing?

Answer 23

1. non consolidating subsidiary
2. special purpose entity
3. operating leases (most commonly used to acquire assets)

Question 24

US GAAP allows companies to value financial assets and liabilities at _____ instead of the amortized initial amount.

Answer 24

fair value

Question 25

How is the ending fair value adjustment (FVA) balance calculated?

Answer 25

fair value - carrying value

Question 26

When there is a difference between the fair value and the carrying value, the company will record ___ to adjust FVA account to ending balance.

Answer 26

an unrealized gain/loss

Question 27

What are the reporting implications of fair value?

Answer 27

• unrealized gains/losses in income statment

- bond carrying value is adjusted to fair value in the balance sheet

Question 28

With early extinguishment of debt, you record a ____.

Answer 28

gain or loss

Question 29

How is the gain/loss calculated with early extinguishment of debt?

Answer 29

reacquisition price - carrying value

Question 30

When paying off bonds payable early, so they get written off.

Answer 30

early extinguishment of debt

Question 31

Face Value - unamortized discount =

Answer 31

carrying value

Question 32

1. include the details of each issue:
   - interest rates
   - payment terms
   - maturity dates
   - collateral and conversion privileges
2. aggregate amounts maturing for each of the next five years.

Answer 32

financial statement disclosures

Question 33

What are the restructuring options when troubled debt restructuring occurs?

Answer 33

1. settlement
2. modification of terms type 1
3. modification of terms type 2

Question 34

What are the settlement options for restructuring?

Answer 34

1. creditor accepts assets < carrying value
2. creditor records a loss (can be cash or an asset)
3. debitor records a gain (can be cash or an asset)