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ACC 321 > Chapter 14: Long-Term Liabilities > Flashcards

Chapter 14: Long-Term Liabilities Flashcards

1
Q

What is a bond?

A

Debt security with two promises: promise to pay back amount borrowed after some period of time (principal) and a promise to make periodic interest payments

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2
Q

How are cash flows from a bond determined?

A

From the face amount of the bond and the stated rate of interest

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3
Q

How is a bond’s value/price determined?

A

From the present value of the future cash flows

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4
Q

Secured vs. Unsecured Bonds

A

Unsecured bonds are debentures and are more risky (no form of collateral), Secured bonds have collateral

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5
Q

Term vs. Serial Bonds

A

Term bonds (scheduled payments), serial bonds (stagger payments)

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6
Q

Callable Bonds

A

At the option of the company, principal can be paid early making it less attractive to investors

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7
Q

Convertible Bonds

A

At option of investor, exchange the bond for some other security

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8
Q

Commodity-backed bonds

A

At investor’s option, can take payment of principal in commodity

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9
Q

Deep discount bond

A

Issued at interest rate significantly less than market rate

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10
Q

Registered vs. Coupon Bonds

A

Registered (know who should be paid), Coupon (anyone who holds bond can redeem it)

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11
Q

Income vs. Revenue Bonds

A

Income (only pay interest when have income), Revenue (government bonds that guarantee revenue of some project and only paid when revenue is made on that project)

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12
Q

What drives the price at which debt is issued?

A

The market rate of interest plus risk

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13
Q

What is the price of a bond?

A

The present value of future payments of principal and interest discounted at the market rate of interest on day of issue

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14
Q

Formula for Bond Proceeds/Price

A

PV of single amount + PV of annuity

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15
Q

When is a bond issued at a discount?

A

When the bond is issued at a price below its face value, market rate of interest is higher than the coupon rate

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16
Q

When is a bond issued at a premium?

A

When a bond is issued at a price above its face value and the market rate of interest is lower than the coupon rate

17
Q

Calculation of discount or premium on bond

A

Face value - Proceeds = Discount, Proceeds - Face Value = Premium

18
Q

Recording of bond being issued at discount/premium

A

Discount on Bonds payable (contra account) debited, Premium on bonds payable (adjunct account) credited

19
Q

How are bonds recorded on the books?

A

At their face value

20
Q

Calculation of Book Value of Bond

A

Face Value +/- Premium/Discount

21
Q

How are premiums and discounts amortized?

A

Using the effective interest method

22
Q

Calculation of interest expense

A

Book value of the bond x the market rate of interest at issue date

23
Q

Calculation of amortization of the discount or premium

A

Cash interest paid - Interest Expense

24
Q

Method used when apportioning interest between periods

A

Straight Line Amortization (Number of months in the period/Months between payments)

25
Q

What is the market value of bonds at any point a function of?

A

Time remaining and market rate of interest

26
Q

Debt extinguishment

A

Paying off bond early

27
Q

Recording of debt extinguishment

A

Accrue interest to date of exchange, Bring amortization schedule up to date, and recognize gains and losses

28
Q

Process of debt being exchanged for non-cash assets

A

Value asset at discounted value of debt principle and interest unless there is a high degree of certainty about FMV of asset

29
Q

Are are notes payable valued?

A

At the present value f their future interest and principal cash flows

30
Q

How are discounts and premiums on notes amortized?

A

Over the life of the notes

31
Q

Deep discount notes

A

Bear no interest and are sold at discount substantially below principal amount

32
Q

Recording of deep discount note

A

Note recorded for principal value and discount for different in principal amount and proceeds

33
Q

How is the discount on notes payable amortized?

A

Using the effective interest method

34
Q

Recording of notes issued for property with stated interest rate

A

Record property at the PV of the note

35
Q

Recording of notes issued for property with no interest rate

A

Record property at fair value of asset and record discount for difference between fair value of asset and face value of note

36
Q

Installment notes

A

Payment consists of part principal and part interest

37
Q

Recording of installment notes

A

recognize interest expense and amortize principal at each payment

38
Q

How are installment notes amortized?

A

Directly, no premium or discount account

ACC 321 (4 decks)

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