Concepts CH 12

Question 1

Bond issued at par

Answer 1

Bond interest rate is equal to market rate

Question 2

Bond issue at premium

Answer 2

Bond interest rate above market rate

Question 3

Bond issue at discount

Answer 3

Bond interest below market rate

Question 4

Serial bonds

Answer 4

mature in installments

Question 5

Term bonds

Answer 5

mature in one sum at end of bond life

Question 6

Debentures

Answer 6

Unsecured bonds

Question 7

Discount or premium

Answer 7

is not an asset or liability separable from related note and should therefore be reported in balance sheet as direct reduction or addition to ace amount of note

Question 8

Accrued interest on NP at balance sheet date

Answer 8

Is carrying amount of note x interest rate on the note

Question 9

Bond issue costs

Answer 9

direct deduction form the face amount of debt. Amortized over term of the debt

Question 10

Present Value

Answer 10

Value today for a future payment

Question 11

Non-interest bearing notes should be measured

Answer 11

at PV rather than face amount

Question 12

TDR

Answer 12

May occur as
1) Asset exchange
2) Modifcaiton of terms
or combination of methods

Question 13

ARO

Answer 13

Recognized for legal obligation of retirement of long-lived asset.

Question 14

All Extinguishments of debt for maturity

Answer 14

Fundamentally alike and should be accounted for similarly

Gain/(Loss) should be recognized in income for period of extinguish

Question 15

Gain or Loss on Extinguishment

Answer 15

Is the difference between reacquisition price and carrying amount

Question 16

TDR Modification Terms - Debtor UCF > Carry amount of debt

Answer 16

No gain recognized

Question 17

TDR Modification Terms - Debtor UCF

Answer 17

Debtor’s Gain

Question 18

TDR Modification Terms - Creditor DCF > Carry amount of carry amount of receivable or DCF < Carry amount of receivable

Answer 18

Creditors Loss

Question 19

Pay interest only if debtor is profitable

Answer 19

income bonds

Question 20

Bonds entitle holder to receive excess earnings

Answer 20

participating bonds

Question 21

detachable coupon for each interest payment

Answer 21

bearer bonds

Question 22

TDR occurs when

Answer 22

a creditors economic or legal reason related to debtor’s financial difficulties grants concessions to debtor it would not otherwise consider

Question 23

When TDR involves settlement in full with granting of equity interest

Answer 23

Creditor recognized loss in amount in difference of assets received and carrying amount of debt
Debtor only recognized gain on restructuring

Question 24

When TDR involves settlement in full with transfer of assets

Answer 24

Creditor recognized loss in amount in difference of assets received and carrying amount of debt
Debtor recognized gain on restructuring and gain or loss (FV - Carrying Amount) of assets given

Question 25

When TDR involves modification of terms and the undiscounted total future cash flows which debtor is committed to pay is less than carrying amount of debt

Answer 25

Debtor recognized gain

Question 26

When TDR involves modification of terms, a creditor must recognize the impairment of a loan when it is probable that the creditor will not be able to collect all amounts due in accordance with the terms of the loan

Answer 26

The loss is the difference between the discounted cash flows and the carrying amount of receivable retired

Question 27

Registered Bonds and Convertible Bonds are

Answer 27

debentures

Question 28

Debt issue cost include

Answer 28

Printing and engraving costs,
Legal fees,
Accountants’ fees,
Underwriters’ commissions,
Registration fees, and
Promotion costs.

Question 29

ARO

Answer 29

reflects obligation from acquisition, construction, or normal operation of an asset. The entity must recognize the liability for ARO at PV of future cash flows to settle obligation discounted at the credit-adjusted risk-free rate

Question 30

The Future payment can be determined by

Answer 30

Dividing PV of an amount by he relevant interest factor

Question 31

Future Value of a single amount

Answer 31

is the amount available at specified time in the future based on a single investment today

Question 32

warrants are exercised,

Answer 32

The transaction is based on the exercise price, not the fair value of the stock or warrants at the time of issuance.

Question 33

All TDR Gain is recognized

Answer 33

in the income statement

Question 34

When bond discount is amortized using the effective-interest method,

Answer 34

the carrying amount of the bonds increases by a greater amount every period. Under the straight-line method, however, discount amortized is a constant periodic amount. Thus, in the first year, straight-line amortization of the discount exceeds the amount determined under the interest method.

Question 35

Zero-coupon bonds

Answer 35

do not pay periodic interest. The bonds are sold at a discount from their face value, and the investors do not receive interest until the bonds mature. The issuer does not have to make annual cash outlays for interest. However, the discount must be amortized annually and reported as interest expense.

Question 36

non-detachable warrants

Answer 36

conversion feature is considered inseparable from debt and the entire proceeds are attributed to debt

Question 37

Detachable Warrants - Proceeds

Answer 37

Must be allocated between underlying debt and warrants pro rata

Question 38

FV of Warrants

Answer 38

Face Value of Debt/Number of bonds x number of warrants issued per bond = Total warrants
Total warrants x FV trading = Total value of warrants