Deck #12 (F5) Flashcards
how do you record long term liabilities and what are some examples?
at present value
- LT notes
- bonds
- LT leases
- LT contingent liabilites
- deferred comp agreements
- pensions
how do you distinguish liabilities from equity?
liabilities have a maturity date
bonds:
what is a stated rate?
also called coupon rate or nominal rate.
the interest to be paid to the investors in cash. specified in the contract
bonds:
what is a market rate?
rate of interest actually earned by the bondholder and is the rate of return for comparable contracts
bonds:
what is a discount?
if the market rate is higher than the stated (or nominal rate)
bonds:
what is a premium?
if the market rate is lower than the stated (or nominal rate) rate
what is a convertible bond?
convertible into common stock of the debtor. typically have nondetachable or detachable warrants
nondetachable warrant - the CB itself must be converted itself into stock
detachable warrant - bond is not surrendered upon conversion, only the warrants plus cash representing the exercise price of the warrants. warrants can be bought and sold separate from bonds.
what is a debenture?
an unsecured bond
what is a term bond
term bonds have single fixed maturity dates
what is a serial bond
serial bonds are renumbered bonds that the issuer may call and redeem a portion by the serial number
when is a bond “issued at par value”
when the stated (nominal) rate is equal to the market (effective) rate on date of issuance
straight line vs effective interest method of amortization?
SL - not GAAP, unless its essentially the same result as effective int.
SL - IFRS does not allow
Just use effective interest method
how is interest expense calculated?
premium (discount) and issue cost / number of periods bond is outstanding = premium amortization
interest expense = (face value x interest rate) - premium amortization (or plus discount and bond issuance cost amort.)
Company A issues a 10% bond, 1,000,000 due in five years. The current market rate is 12%. what type of bond amortization model is used?
bond DISCOUNT
JE: recording bonds on issuance date for BORROWER and INVESTOR under straight line (discount)
BORROWER
DR: Cash
DR: Discount on bond payable
CR: Bond Payable
INVESTOR
DR: Investment in bonds
CR: Cash
Note: premium entry would be the same except for changing the wording
JE: recording first interest payment for BORROWER and INVESTOR under straight line (discount)
BORROWER
DR: Bond interest expense
CR: Discount on bond payable
CR: Cash
INVESTOR
DR: Cash
DR: Investment in bonds
CR: Bonds interest revenue
Note: premium entry would be the same except for changing the wording
JE: What are the 2 entries to record bond amortization for the Borrower under effective interest method
record bonds at issuance
DR: Cash
CR: Premium/discount on bonds payable
CR: Bond payable
first interest payment
DR: Bond interest expense
DR: Premium on bonds payable
CR: Cash
JE: What are the 2 entries to record bond amortization for the Investor under effective interest method
record bonds at issuance
DR: Investment in bonds
CR: Cash
first interest payment
DR: Cash
DR: Investment in Bonds
CR: bond interest revenue
what happens if bonds are issued between interest dates?
you must accrue interest. this is done by multiplying the face amount by the interest rate (for the number of months accrued/12)
what is trouble debt restucturing
when creditor allows the debtor certain concessions to improve the likelihood of collection
when is the debt considered extinguished?
once the transfer of assets or transfer of equity interest has taken place (this does not happen under the modifications of terms type)
what are the 4 types of troubled debt restructuring?
- transfer of assets
- transfer of equity
- modification of terms
- there could be a combination of types
how is impairment recorded by the creditor?
DR: bad debt exp
CR: Allowance for credit losses
