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FAR > F5- Long-Term Debt & B/P > Flashcards

F5- Long-Term Debt & B/P Flashcards

1
Q

What is a serial bond?

A
  • Any bond that matures in installments

- Allow the issuer to match maturity dates with the organization’s cash flow requirements.

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2
Q

What is a term bond?

A

Any bond that matures on a single date

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3
Q

What is a debenture bond?

A

A bond not secured by any collateral

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4
Q

What is a sinking fund bond?

A

Cash is held in a sinking fund for repayment of bond at maturity

5 years of requirements and maturity details should be disclosed

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5
Q

What is the formula to calculate proceeds of a bond sale?

A

Present Value of the principal payment at maturity+ Present Value of Interest Payments made
: Market Value of Bond Proceeds

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6
Q

How is the present value of a bond calculated?

A

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)

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7
Q

Which costs are included in bond issuance costs?

A

Include Engraving; Printing; Legal; Underwriter; Registration

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8
Q

How are bonds reported when classified as trading securities?

A

Reported at FMV with unreleased gains and losses being included in earnings

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9
Q

How are bonds amortized under the interest method?

A

Both discount and premium amortization amounts increase each year

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10
Q

Describe the book value method when converting from bonds to stocks.

A

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

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11
Q

What is the stated rate for a bond?

A

Rate on the face of the bond

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12
Q

What is the market rate on a bond?

A

Rate that bonds are currently selling for

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13
Q

What happens when the bond’s market rate is GREATER than the stated rate?

A
  • Bond will need to sell at a discount
  • The difference in market rate vs. the stated rate
  • The buyer purchasing the bond for less than par value
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14
Q

What happens when a bond’s market rate is LESS than the stated rate?

A
  • Bond will need to sell at a premium
  • The difference in market rate vs. the stated
  • The buyer purchasing the bond for more than par value
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15
Q

How does accrued interest on a bond affect the purchase price?

A

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.

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16
Q

When does interest expense start accruing on a bond?

A

When the bonds are issued

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17
Q

How is an interest payment on a bond calculated?

A

Cash for payment : Stated rate x Face amount

18
Q

What amount of interest is expensed on a bond interest payment?

A

Interest expense : effective yield x carrying value

Any difference between expense and cash payment is applied as amortization against premium/discount

19
Q

What are convertible bonds? Which recording method is used?

A

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

20
Q

How is the Retirement of Bonds G/L recorded?

A

Gain or Loss is Ordinary

Extraordinary if both unusual and infrequent

21
Q

When is a Gain recognized in a Debt Restructuring?

A
  • If terms are modified
    &
  • Future payments are now less than the carrying amount of the debt:
  • Then a Gain is recognized
22
Q

What is the Gain recognized under a Settlement of Debt?

A
  • Difference between cash paid and carrying amount of debt

- Difference between non-cash asset given and re-valued at FMV and debt carrying amount

23
Q

For a creditor, how is the Effective Rate calculated when

Future cash flows discounted at loan’s Effective Interest Rate are LESS than Carrying Value:

A
  • Effective Rate calculated using original rate

- Impairment recorded

24
Q

Amortization Period over what term?

[US GAAP]

A
  • The period over which to amortize a bond premium or discount is the time period the bonds are outstanding
  • Done over the contractual life of the bond.
25
Q

Amortization over? [IFRS]

A
  • Is done over the expected life of the bond

- NOT the contractual life of the bond

26
Q

Straight-line Method is & allowed under GAAP?

A
  • In a constant dollar amount of interest each period.
  • Is not GAAP but is allowed under US GAAP if the results are not materially different from the effective interest method

Periodic amortization= Premium or discount/ # of periods bond is outstanding

27
Q

Straight-line Method

[IFRS]

A
  • Not permitted
28
Q

How does Discount Amortization affect carrying value of a bond?

A
  • Increases carrying value
29
Q

How does a Premium affect carrying value of bond

A
  • Decreases Carrying Value
30
Q

Effective Interest Method is & Calc?

A
  • Use for the amortization of unamortized discount/premiums is required by both U.S. GAAP & IFRS

Interest Exp= Carrying value at beg. of the period
X Effective interest rate

31
Q

Bond Sinking Funds, kind of Asset?

A
  • Generally a non-current (restricted) asset on the financial st. of the issuer.
32
Q

Bond Sinking Fund:

Appropriation

A
  • Bond Sinking Fund Reserve is merely an appropriation of R/E to indicate to the shareholders that certain R/E are being accumulated for Bond Sinking Fund.
33
Q

Conversion of the Bonds to Stock may be recorded under either:

A
  • The BV method (US GAAP)
    OR
  • Market Value Method (Not GAAP)
34
Q

Book Value Method

[Convertible Bonds]

A
  • No Gain or loss is recognized.
  • At B/P & related premium or discount are written off.
  • A.P.I.C. is credited for excess of the bond carrying value over the stock par value less any conversion costs.
35
Q

Market Value Method

[Convertible Bonds]

A
  • Views the conversion as culmination of the earnings process
  • Thereby resulting is a Recognized Gain or Loss.
36
Q

Premium

[Convertible Bonds]

A
  • More then face
  • Conversion feature cannot be assigned a value
  • Difference betwn proceeds & face value of the bonds are recorded as premium on B/P.
37
Q

Book Value Method Upon Conversion

[Convertible Bonds]

A

Amortize up to Conversion Date:

  • The bond Discount or Premium
  • The bond issue costs
  • Pay the Accrued Interest up to the conversion date
  • Record any difference as APIC.
38
Q

Bonds Sold with Detachable Stock Purchase Warrants

A
  • Account for separately

Cash XXX

  • — B/P XXX
  • —-APIC-warrants XXX
39
Q

Stock Warrant: To record the issuance of stock to the holder of the warrant:

A
  • On Exercise date:

Cash XXX
APIC- warrants XXX
——C/S (at par) XXX
——-APIC XXX

40
Q

Bond Issue Costs

[IFRS]

A
  • Are not recorded as a separate asset.

- Are deducted from the carrying value of the liability & amortized using the effective interest method.

41
Q

How are Bond Issuance Costs Recorded?

A

-Debited to a deferred charge account and amortized over life of Bond using S/L

  • Net Bond Proceeds:
    Bond Proceeds - Bond Issuance Costs

-Time of amortization begins when issued

42
Q

Market Value Method for Convertible Bonds at Conversion Date

A
  • B/P & related Premium are written off
    &
  • C/S is credited at Par.
  • Difference between Market Value & Bk Value is recognized gain or loss on redemption. (Plug)

FAR (24 decks)

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