Chapter 5 Section 3: Long-Term Liabilities and Bonds Payable Flashcards
Define bond indenture
The contract
Define stated (nominal or coupon) interest rate
To be paid to investors. Specified in the contract
Define market (effective) interest rate
Rate of interest actually earned by the bondholder - what they’d get for comparable contracts
Define discount
Market rate > stated rate
Define premium
Stated rate > market rate
Define debenture
Unsecured bond
Define mortgage bond
Secured by real property
Define collateral trust bonds
Secured bond
Define convertible bonds
Convertible into common stock by using either detachable or nondetachable warrants
Define nondetachable warrant
The convertible bond must be converted into C/S
Define detachable warrant
The bond isn’t surrendered upon conversion - the warrants can be bought and sold separately from the bond
Participating bond
Participate in income
Term bond
Have a single fixed maturity date where you pay the entire principal
Serial bond
Multiple bonds that are callable by a serial number
Income bonds
Only pay interest when income objectives are met
What goes into the calculation of the fair value of a bond?
PV of future interest pmts at market rate
PV of principal at market rate
What is the amount of interest the bondholder receives?
Stated rate x face value
How is unamortized discount reported?
A contra liability that directly reduces the bond payable.
You get less, subtract.
How is unamortized premium reported?
A direct addition to the bond payable
You get more, add
Explain bond issue costs
They are transaction costs, and are a deferred charge (asset) and amortized by the person issuer
What are the two methods for premium and discount amortization?
Which are allowed under GAAP and IFRS?
Straight line and effective interest are both good for GAAP
Only effective interest for IFRS
Explain straight line amortization
premium or discount/periods bond is outstanding
interest expense = required amount - premium amortization or + discount amortization
always move toward the face
Explain effective interest method
net carrying value x effective interest rate = int exp
bond face x coupon rate = int paid
int exp - int paid = amortization
Define and classify bond sinking fund
Restricted cash pursuant to the indenture where the company puts in money each year so they have enough to repay it at maturity.
It’s a noncurrent asset
What is the bonds outstanding method?
It’s for serial bond amortization
It’s like sum of the year’s digits. Take the fraction of the total bonds outstanding and multiply that by the premium.
Are convertible bonds usually sold at more of less than face value? Why
More because of the value of the conversion feature
What is the difference in how IFRS and GAAP report convertible bonds?
IFRS recognizes a debt and equity component always.
GAAP only does when it’s detachable,
List and explain the two methods of accounting for convertible bonds
Book Value: no gain or loss. At conversion, write off the bond payable and premium or discount and credit stock at par. APIC is the plug.
Market Value: not GAAP. Recognizes gain or loss. Everything is the same, except APIC is only market price over par of the stock. Everything else is a gain or loss.
What are the two methods for detachable warrants, and when is each used?
Warrants only - when only the FV of the warrants is known
Market value - when the FV of the warrant and bond is known
