Chapter 16 Flashcards
Current Liability
paid within a year or less (or one operating cycle, whichever is longer)
Long-term Liability
paid after one year (or one operating cycle, whichever is longer)
bonds
formal written agreement of a long term liability (typically 3-10ish years). issuer agrees to pay back face value + interest
the initial bond issuance is also called…
initial public offering
primary market
the initial bond issuance
who usually buys bonds on the primary market?
banks or investment companies
does the secondary market impact the issuer’s financial statements?
no
who usually buys bonds on the secondary market?
investors, sold by banks or investment companies
when is principal paid back in a term bond?
at the end of the bond’s term
when is principal paid back in a serial bond?
periodically (part principal, part interest)
Callable Bond
can be redeemed early at the discretion of the issuer
Convertible Bond
can be converted to another type of equity
the bond indenture is the…
formal bond agreement
who is the issuer?
the one borrowing money
the issuer repays the…
principal + interest
issuer is also known as…
debtor
bond holder is also known as…
creditor or investor
who is the bond holder?
the one who bought the bond, the one who gives money
1st phase of initial bond issuance
approach the bank
2nd phase of initial bond issuance
receive credit rating
3rd phase of initial bond issuance
bond issued onto primary market
in what phase is the stated rate given?
phases 1 and 2
in what phase is the market rate given?
phase 3
discount on bond payable is a ____________ account
contra-liability
formula for carrying value
the bond payable plus the premium on bond payable OR minus the discount on bond payable
selling price is also known as…
present value
stated rate is also known as…
coupon rate, nominal rate, contractual rate
market rate is also known as…
effective rate or yield rate
what is the market rate?
the going rate for similar bonds on the exact day it is issued
difference between market rate and stated rate
stated rate is the initial offering (what’s in the contract). market rate is the going rate in present conditions.
2 factors affecting difference between market rate and stated rate
passage of time and change in market conditions
formula for rate
market rate / number of periods in a year
formula for NPER
number of years * number of payments per year
formula for PMT
face value of bond * stated rate / number of periods in a year
FV
repayment of principal (negative usually)
when is the bond issued at face value?
stated rate = market rate
bond issued at a discount
creditor gave us less principal than we pay back
when is a bond issued at discount (rates)?
when the market rate is higher than the stated rate
when is a bond issued at a discount (selling price)?
when the selling price is lower than the face value
bond issued at discount: ________ selling price, _______ market rates
lower, higher
bond is always recorded at:
face value
place in order on balance sheet: bond payable, liability, discount on bond payable
liability, bond payable, discount on bond payable
when is a bond issued at premium (selling price)?
selling price is more than face value
when is bond issued at premium (rates)?
stated rate is higher than market rate
bond issued at premium: _______ selling price, ______ market rates
higher, lower
cash is the ________, while bond payable is the _________
present value, face value
what is protocol for a bond issued between periods?
creditor loans principal + missed interest, debtor pays back missed interest
the ___________ method is GAAP preferred
effective interest
formula for cash payments of interest
face value of bond * stated rate / number of periods in a year (same as pmt)
formula for effective interest expense
carrying value of the bond at the beginning of period * market rate / number of periods in a year
expense of borrowing money is ________
interest
stock warrants
option to purchase shares of stock from the issuer (the right to buy stock in the future)
strike price
the set price a creditor can buy stock at in the future
nondetachable stock warrants
stock warrants that cannot be separated from the bond
in a nondetachable bond, the entire bond price is allocated to:
bonds payable, nothing in equity
paid-in capital is a(n) __________ account
equity
detachable bonds have ________ and __________ methods
incremental and proportional
incremental and proportional methods are part of ________ bonds
detachable
in a detachable bond:
stock warrants have a determinable fair value
in a detachable bond, the bond price is split between ________ and ________
bonds payable and equity
the four accounts involved in detachable bonds are:
- cash
- bonds payable
- paid-in capital - stock warrants
- premium/discount on BP
the incremental method is used when:
we only know the value of the stock warrants, not the fair value of the bond
the proportional method is used when:
we know the fair value of both the stock warrants and the bonds
in the proportional method, the formula for journal entries of bonds payable and paid-in capital is:
bond payable: face value
paid in capital: (FVM of warrants/total FVM) * cash received
premium/discount: difference between face value and proportion of bond
the common stock account is always recorded at _________
par
when warrants expire or are exercised, they are moved into the ___________ account
paid in capital- common stock
which accounts related to bonds are on the balance sheet?
- liabilities
- bonds payable
- less: discount / add: premium
- carrying value
which accounts related to bonds are on the income statement?
other revenues/expenses (interest expense)
______________ and ___________ accounts are plug accounts
paid-in capital: common stock and premium/discount on bonds payable
which account is debited in relation to a cash incentive for bond holders to convert their bond?
debt conversion expense
