F 5 Bonds and Leases Flashcards
What is a serial bond?
Any bond that matures in installments
What is a term bond?
Any bond that matures on a single date
What is a debenture bond?
A bond not secured by any collateral
What is a sinking fund bond?
Cash is held in a sinking fund for repayment of bond at maturity
5 years of requirements and maturity details should be disclosed
What is the formula to calculate proceeds of a bond sale?
Present Value of the principal payment at maturity+ Present Value of Interest Payments made
: Market Value of Bond Proceeds
How is the present value of a bond calculated?
Step 1: PV of $1 @ Yield Rate (not Stated Rate)
x Bond Face Value
PLUS
Step 2: PV of an Ordinary Annuity of $1 for Term @Yield
x (Stated Rate x Face)
Which costs are included in bond issuance costs? How are they recorded?
Include Engraving; Printing; Legal; Underwriter; Registration
Debited to a deferred charge account and amortized over life of Bond using S/L
Bond Proceeds - Bond Issuance Costs : Net Bond Proceeds
Time of amortization begins when issued
How are bonds reported when classified as trading securities?
Reported at FMV with unreleased gains and losses being included in earnings
How are bonds amortized under the interest method?
Both discount and premium amortization amounts increase each year
Describe the book value method when converting from bonds to stocks.
No gain or loss recognized
APIC is the plug for the difference between the Bond’s Book Value and the Par Value of the Common Stock
What is the stated rate for a bond?
Rate on the face of the bond
What is the market rate on a bond?
Rate that bonds are currently selling for
What happens when the bond’s market rate is greater than the stated rate?
Bond will need to sell at a discount in order for buyers to be interested. The difference in market rate vs. the stated is made up by the buyer purchasing the bond for less than par value
What happens when a bond’s market rate is less than the stated rate?
Bond will need to sell at a premium in order for buyers to be interested. The difference in market rate vs. the stated is made up by the buyer purchasing the bond for more than par value
How does accrued interest on a bond affect the purchase price?
The total cash that seller receives will be MORE than they normally would (set aside any considerations for premium or discount; they are irrelevant for this point).
Basically; the purchaser of the bonds must give the bond issuer the amount of accrued interest up front.
When does interest expense start accruing on a bond?
When the bonds are issued
How is an interest payment on a bond calculated?
Cash for payment : Stated rate x Face amount
What amount of interest is expensed on a bond interest payment?
Interest expense : effective yield x carrying value
Any difference between expense and cash payment is applied as amortization against premium/discount
What are convertible bonds? Which recording method is used?
Bonds that can be converted to stock
Book value method used if no gain or loss
Market value method used if there is a gain or loss
How is the retirement of bonds recorded?
Gain or Loss is Ordinary
Extraordinary if both unusual and infrequent
When is a gain recognized in a debt restructuring?
If terms are modified; and future payments are now less than the carrying amount of the debt; then a Gain is recognized
What is the gain recognized under a settlement of debt?
Gain recognized:
Difference between cash paid and carrying amount of debt
Difference between non-cash asset given and re-valued at FMV and debt carrying amount
For a creditor; how is a loan impairment recorded?
If future cash flows discounted at loan’s Effective Interest Rate are less than Carrying Value:
Effective Rate calculated using original rate; not modified rate
How is a Capital Lease recorded?
Capitalize at cost: Asset & Liability Recorded at Present Value of Future Lease Payments
What footnote disclosures are required for a Capital Lease?
Future minimum rental commitments
By year - for 5 years
All remaining years as a group
What are the requirements for a Capital Lease for a lessor?
Same as for lessee (Title- BPO or Substance)- PLUS:
Collectability of lease payments is predictable
No uncertainties about the lessor reimbursing the lessee for costs incurred
What are the characteristics of an Operating Lease for a lessee?
Risk of ownership does NOT pass
No asset or liability is recorded on the financial statements
Leasehold improvements - capitalized and depreciated over the lesser of lease life or leasehold improvement’s life.
What are the characteristics of an Operating Lease for a LESSOR?
Rent revenue recorded
Leased property remains an asset and depreciated by lessor
If payments fluctuate over the term of the lease- rent revenue recognized on a straight line basis
What are the characteristics of a Direct Financing Lease?
Interest Revenue (or expense for lessor) decreases with passage of time
Principal amount increases with each payment
Carrying amount of Lease decreases
How is a sale-leaseback recorded?
Any profit on the sale is deferred and amortized
Exception: If PV of lease payments is 10% or less of the asset’s FMV- the gain is recognized
If PV of lease payments is greater than 10% of FMV and the lease is operating- all of the gain is recognized except the amount of the PV of the lease payments
What are the characteristics of lease payments under an annuity due situation?
Payments begin at the start of the lease period
Think: Rent/Mortgage payments are Due at the first of the month
What are the characteristics of lease payments under an ordinary annuity situation?
Payments begin after the end of the first year
Think: An annuity that pays you at the end of each year
What are the characteristics of a Capital Lease for a lessee?
Risk of ownership passes to lessee by:
Title,
Bargain Purchase Option (BPO),
Substance - Lease is more than 75% of asset’s useful life or PV of minimum lease payments are more than 90% of fair value
