F4 (LT-L, Trbl Debt Restr+Extinguishment)

Question 1

bond discount vs. premium rates:

Answer 1

*discount: effective rate > stated rate

(investors pay less than face value)

*premium: effective rate < stated rate

(investors pay more than face value)

**bonds issued at par: effective rate = stated rate

Question 2

JE for premiums and discounts:

Answer 2

• premiums: Cr premium b/c we pay more cash (Dr)

* discounts: Dr discount b/c we pay less cash (Dr)

Question 3

amortization of bond premiums and discounts:

Answer 3

• SL is tolerable under GAAP but forbidden under IFRS

* effective int method is used for GAAP + IFRS (bond amort table)

Question 4

effective interest method:

Answer 4

• BS: bond face * coupon rate = interest paid (I/P)
• IS: NCV * effective int rate = interest expense

**int paid - int exp = amortization; all amort goes toward the face

Question 5

retirement of bonds: [IS g/l]

Answer 5

*retiring premium bond:
Dr B/P
Dr premium 
(Dr loss)
Cr Cash
(Cr gain)

*retirement discount:
Dr B/P
(Dr loss)
Cr discount
Cr Cash
(Cr gain)

Question 6

imputing interest:

Answer 6

N/R and N/P are recorded as PV when interest rate is not stated or when stated interest rate is unreasonably low

• diff b/w face and PV of note is recorded as a discount and amortized over life of the note (SL)

Question 7

trouble debt restructuring:

Answer 7

debtor is relieved of its obligation to creditor ONLY BY:

• paying the creditor
• being released of debt judicially or by creditor (considered debt is extinguished by placing cash in an irrevocable trust is NOT GAAP for extinguishment)

Question 8

Trbl Debt Restructuring accounting:

Answer 8

by Debtor:

[transfer of assets]:
FV asset transferred
(-) CV asset

= G/L; asset marked to MV thru IS

(-) CV payable

= Gain (concession G)

[transfer of Equity]:

FV equity transferred

(-) CV payable

= Gain

[Mod of Terms]:
debtor accounts for effects prospectively and does not show CV or gain UNLESS
[CV > total FCF]

by Creditor:
BDE is recog’d for diff b/w loan amount and FV of item being received and/or PV of expected CF discounted at loans’ historical effective int rate