Chapter 14: Long-Term Liabilities Flashcards
What are the general characteristics of Bonds?
- promise to pay a stated amount at a specified maturity date
- required periodic interest as a stated percentage of face
- represent a liability to the company that issues the bonds (issuer) and an asset to the company that purchases the bonds (investor)
How are bonds sold?
bonds sell at price plus accrued interest
The price of a bond is what?
the present value of total cash flows (principle and interest) using the market rate
Bonds are typically stated in terms of a ___ of ___.
percentage / face value
market rate = stated rate
bond is issued at face value
market rate > stated rate
bond is issued at discount
market rate < stated rate
bond is issued at premium
How are bonds reported?
carrying value
bond discounts are recored as _____ to bonds payable and investment in bonds
contra accounts
bond premiums represent adjunct accounts which ___ bonds payable and investment in bonds
increase
How is carrying value calculated?
Face - discount + premium
___ decreases the value of a bond.
discounts
___ increases the value of a bond
premiums
How is interest expense calculated in the effective interest method?
carrying value * market rate
How is the coupon payment calculated in the effective interest method?
face value * stated rate
In the effective interest method, the difference is reflected as…
amortization of discount or premium
What type of method has equal portions of discount/premium amortization each interest period?
straight line method
How is the coupon payment calculated in the straight line method?
face value * stated rate
How is the difference of discount/premium and the coupon payment recorded in the straight line method?
interest expense
Which method results in the same amount of interest of total interest expense over the life of the bond?
both methods
If an accounting period ends between interest dates, interest should be ____.
accrued
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.
debit issue costs
What are the three Off-Balance Sheet Financing?
- non consolidating subsidiary
- special purpose entity
- operating leases (most commonly used to acquire assets)
US GAAP allows companies to value financial assets and liabilities at _____ instead of the amortized initial amount.
fair value
How is the ending fair value adjustment (FVA) balance calculated?
fair value - carrying value
When there is a difference between the fair value and the carrying value, the company will record ___ to adjust FVA account to ending balance.
an unrealized gain/loss
What are the reporting implications of fair value?
- unrealized gains/losses in income statment
- bond carrying value is adjusted to fair value in the balance sheet
With early extinguishment of debt, you record a ____.
gain or loss
How is the gain/loss calculated with early extinguishment of debt?
reacquisition price - carrying value
When paying off bonds payable early, so they get written off.
early extinguishment of debt
Face Value - unamortized discount =
carrying value
- include the details of each issue:
- interest rates
- payment terms
- maturity dates
- collateral and conversion privileges - aggregate amounts maturing for each of the next five years.
financial statement disclosures
What are the restructuring options when troubled debt restructuring occurs?
- settlement
- modification of terms type 1
- modification of terms type 2
What are the settlement options for restructuring?
- creditor accepts assets < carrying value
- creditor records a loss (can be cash or an asset)
- debitor records a gain (can be cash or an asset)
