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ACCT 3313 Financial III > Chapter 16 > Flashcards

Chapter 16 Flashcards

1
Q

Current Liability

A

paid within a year or less (or one operating cycle, whichever is longer)

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2
Q

Long-term Liability

A

paid after one year (or one operating cycle, whichever is longer)

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3
Q

bonds

A

formal written agreement of a long term liability (typically 3-10ish years). issuer agrees to pay back face value + interest

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4
Q

the initial bond issuance is also called…

A

initial public offering

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5
Q

primary market

A

the initial bond issuance

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6
Q

who usually buys bonds on the primary market?

A

banks or investment companies

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7
Q

does the secondary market impact the issuer’s financial statements?

A

no

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8
Q

who usually buys bonds on the secondary market?

A

investors, sold by banks or investment companies

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9
Q

when is principal paid back in a term bond?

A

at the end of the bond’s term

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10
Q

when is principal paid back in a serial bond?

A

periodically (part principal, part interest)

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11
Q

Callable Bond

A

can be redeemed early at the discretion of the issuer

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12
Q

Convertible Bond

A

can be converted to another type of equity

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13
Q

the bond indenture is the…

A

formal bond agreement

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14
Q

who is the issuer?

A

the one borrowing money

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15
Q

the issuer repays the…

A

principal + interest

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16
Q

issuer is also known as…

A

debtor

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17
Q

bond holder is also known as…

A

creditor or investor

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18
Q

who is the bond holder?

A

the one who bought the bond, the one who gives money

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19
Q

1st phase of initial bond issuance

A

approach the bank

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20
Q

2nd phase of initial bond issuance

A

receive credit rating

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21
Q

3rd phase of initial bond issuance

A

bond issued onto primary market

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22
Q

in what phase is the stated rate given?

A

phases 1 and 2

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23
Q

in what phase is the market rate given?

A

phase 3

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24
Q

discount on bond payable is a ____________ account

A

contra-liability

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25
Q

formula for carrying value

A

the bond payable plus the premium on bond payable OR minus the discount on bond payable

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26
Q

selling price is also known as…

A

present value

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27
Q

stated rate is also known as…

A

coupon rate, nominal rate, contractual rate

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28
Q

market rate is also known as…

A

effective rate or yield rate

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29
Q

what is the market rate?

A

the going rate for similar bonds on the exact day it is issued

30
Q

difference between market rate and stated rate

A

stated rate is the initial offering (what’s in the contract). market rate is the going rate in present conditions.

31
Q

2 factors affecting difference between market rate and stated rate

A

passage of time and change in market conditions

32
Q

formula for rate

A

market rate / number of periods in a year

33
Q

formula for NPER

A

number of years * number of payments per year

34
Q

formula for PMT

A

face value of bond * stated rate / number of periods in a year

35
Q

FV

A

repayment of principal (negative usually)

36
Q

when is the bond issued at face value?

A

stated rate = market rate

37
Q

bond issued at a discount

A

creditor gave us less principal than we pay back

38
Q

when is a bond issued at discount (rates)?

A

when the market rate is higher than the stated rate

39
Q

when is a bond issued at a discount (selling price)?

A

when the selling price is lower than the face value

40
Q

bond issued at discount: ________ selling price, _______ market rates

A

lower, higher

41
Q

bond is always recorded at:

A

face value

42
Q

place in order on balance sheet: bond payable, liability, discount on bond payable

A

liability, bond payable, discount on bond payable

43
Q

when is a bond issued at premium (selling price)?

A

selling price is more than face value

44
Q

when is bond issued at premium (rates)?

A

stated rate is higher than market rate

45
Q

bond issued at premium: _______ selling price, ______ market rates

A

higher, lower

46
Q

cash is the ________, while bond payable is the _________

A

present value, face value

47
Q

what is protocol for a bond issued between periods?

A

creditor loans principal + missed interest, debtor pays back missed interest

48
Q

the ___________ method is GAAP preferred

A

effective interest

49
Q

formula for cash payments of interest

A

face value of bond * stated rate / number of periods in a year (same as pmt)

50
Q

formula for effective interest expense

A

carrying value of the bond at the beginning of period * market rate / number of periods in a year

51
Q

expense of borrowing money is ________

A

interest

52
Q

stock warrants

A

option to purchase shares of stock from the issuer (the right to buy stock in the future)

53
Q

strike price

A

the set price a creditor can buy stock at in the future

54
Q

nondetachable stock warrants

A

stock warrants that cannot be separated from the bond

55
Q

in a nondetachable bond, the entire bond price is allocated to:

A

bonds payable, nothing in equity

56
Q

paid-in capital is a(n) __________ account

A

equity

57
Q

detachable bonds have ________ and __________ methods

A

incremental and proportional

58
Q

incremental and proportional methods are part of ________ bonds

A

detachable

59
Q

in a detachable bond:

A

stock warrants have a determinable fair value

60
Q

in a detachable bond, the bond price is split between ________ and ________

A

bonds payable and equity

61
Q

the four accounts involved in detachable bonds are:

A
  • cash
  • bonds payable
  • paid-in capital - stock warrants
  • premium/discount on BP
62
Q

the incremental method is used when:

A

we only know the value of the stock warrants, not the fair value of the bond

63
Q

the proportional method is used when:

A

we know the fair value of both the stock warrants and the bonds

64
Q

in the proportional method, the formula for journal entries of bonds payable and paid-in capital is:

A

bond payable: face value
paid in capital: (FVM of warrants/total FVM) * cash received
premium/discount: difference between face value and proportion of bond

65
Q

the common stock account is always recorded at _________

A

par

66
Q

when warrants expire or are exercised, they are moved into the ___________ account

A

paid in capital- common stock

67
Q

which accounts related to bonds are on the balance sheet?

A
  • liabilities
  • bonds payable
  • less: discount / add: premium
  • carrying value
68
Q

which accounts related to bonds are on the income statement?

A

other revenues/expenses (interest expense)

69
Q

______________ and ___________ accounts are plug accounts

A

paid-in capital: common stock and premium/discount on bonds payable

70
Q

which account is debited in relation to a cash incentive for bond holders to convert their bond?

A

debt conversion expense

ACCT 3313 Financial III (4 decks)

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