F5 - Liabilities

Question 1

Regarding Bond amortization, what methods are allowed under GAAP and IFRS?

Answer 1

US GAAP

1) Straight line
2) Effective Interest Method

IFRS
1) Effective Interest Method

*SL is NOT allowed under IFRS

Question 2

What on the Balance Sheet equals the CV?

How are Issuance costs treated? Examples?

Last, where are they recorded?
Very Important

Answer 2

Bond Liability = CV

Issue Costs = REDUCE CV

• Legal fees
• Accounting fees
• Underwriting
• Printing

Bond issue costs are ADDED to the discount/premiums
very important

Cash xx
Discount/Issue costs xx
Bond Payable xx

Question 3

What is the interest expense? And how is it calculated?

JE for Borrower and Investor at Issue and 1st interest payment for Discount

Answer 3

Interest Expense = Cash Paid + Amortization (or -)

Borrower:
Cash xxx
Discount xxx
Bond Payable xxx

1st Interest period:
Bond Int Exp xxx
Discount xxx
Cash xxx

Investor:
Investment xx
Cash xx

Cash xx
Bond Investment xx
Bond Interest xx

Question 4

Top-down
How are Bonds recorded on Balance Sheet? And how do you calculate it?

Bond $1,000,000
Stated Rate 10%
Market 8%
Term 5 years
Interest Semi-annual

PV of $1 at 10% for 5 periods - 0.62092
PV of $1 at 8% for 5 periods - 0.68058
PV of $1 at 5% for 10 periods - 0.61391
PV of $1 at 4% for 10 periods - 0.67556
PV of an annuity of $1 at 10% for 5 periods - 3.79079
PV of an annuity of $1 at 8% for 5 periods - 3.99271
PV of an annuity of $1 at 5% for 10 periods - 7.72173
PV of an annuity of $1 at 4% for 10 periods - 8.11090

Answer 4

Recorded at PV

PV:

1) PV of $1 (1/2 yield and 2x the periods)
2) PV of annuity at $1

1) $1mn x 0.67556 = $675,560
2) $50k x 8.11090 = $405,545

PV = 1,081,105 = 405,545 + 675,560

Question 5

What are Asset Retirement Obligations?

How do you record them? And what do you do with them every year?

JE

Answer 5

There are 2 parts you need to worry about - the Asset Retirement Cost and Asset Retirement Obligation. Both are recorded at PV.

For Asset Retirement Cost as an asset and depreciate it every year until you must dispose of it (useful life) so its NBV will be 0

For Asset Retirement Obligation, you have an accretion expense that will increase the obligation to its actual value to dispose at the end of its useful life.

• Record at Present Value for initial entry

Initial
Asset Retirement Cost xx
Asset Retirement Liability xx

Yearly
Depreciation (ARC) xx
     Acc Depreciation xx
 Accretion Exp   xx
     Asset Retirement Obligation xx