Concepts CH 12 Flashcards
Bond issued at par
Bond interest rate is equal to market rate
Bond issue at premium
Bond interest rate above market rate
Bond issue at discount
Bond interest below market rate
Serial bonds
mature in installments
Term bonds
mature in one sum at end of bond life
Debentures
Unsecured bonds
Discount or premium
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
Accrued interest on NP at balance sheet date
Is carrying amount of note x interest rate on the note
Bond issue costs
direct deduction form the face amount of debt. Amortized over term of the debt
Present Value
Value today for a future payment
Non-interest bearing notes should be measured
at PV rather than face amount
TDR
May occur as
1) Asset exchange
2) Modifcaiton of terms
or combination of methods
ARO
Recognized for legal obligation of retirement of long-lived asset.
All Extinguishments of debt for maturity
Fundamentally alike and should be accounted for similarly
Gain/(Loss) should be recognized in income for period of extinguish
Gain or Loss on Extinguishment
Is the difference between reacquisition price and carrying amount
TDR Modification Terms - Debtor UCF > Carry amount of debt
No gain recognized
TDR Modification Terms - Debtor UCF
Debtor’s Gain
TDR Modification Terms - Creditor DCF > Carry amount of carry amount of receivable or DCF < Carry amount of receivable
Creditors Loss
Pay interest only if debtor is profitable
income bonds
Bonds entitle holder to receive excess earnings
participating bonds
detachable coupon for each interest payment
bearer bonds
TDR occurs when
a creditors economic or legal reason related to debtor’s financial difficulties grants concessions to debtor it would not otherwise consider
When TDR involves settlement in full with granting of equity interest
Creditor recognized loss in amount in difference of assets received and carrying amount of debt
Debtor only recognized gain on restructuring
When TDR involves settlement in full with transfer of assets
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
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
Debtor recognized gain
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
The loss is the difference between the discounted cash flows and the carrying amount of receivable retired
Registered Bonds and Convertible Bonds are
debentures
Debt issue cost include
Printing and engraving costs, Legal fees, Accountants’ fees, Underwriters’ commissions, Registration fees, and Promotion costs.
ARO
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
The Future payment can be determined by
Dividing PV of an amount by he relevant interest factor
Future Value of a single amount
is the amount available at specified time in the future based on a single investment today
warrants are exercised,
The transaction is based on the exercise price, not the fair value of the stock or warrants at the time of issuance.
All TDR Gain is recognized
in the income statement
When bond discount is amortized using the effective-interest method,
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.
Zero-coupon bonds
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.
non-detachable warrants
conversion feature is considered inseparable from debt and the entire proceeds are attributed to debt
Detachable Warrants - Proceeds
Must be allocated between underlying debt and warrants pro rata
FV of Warrants
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
