F5- Long-Term Debt & B/P Flashcards
What is a serial bond?
- Any bond that matures in installments
- Allow the issuer to match maturity dates with the organization’s cash flow requirements.
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?
Include Engraving; Printing; Legal; Underwriter; Registration
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
- The difference in market rate vs. the stated rate
- 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
- The difference in market rate vs. the stated
- 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 G/L 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
& - 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?
- 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 the Effective Rate calculated when
Future cash flows discounted at loan’s Effective Interest Rate are LESS than Carrying Value:
- Effective Rate calculated using original rate
- Impairment recorded
Amortization Period over what term?
[US GAAP]
- 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.
Amortization over? [IFRS]
- Is done over the expected life of the bond
- NOT the contractual life of the bond
Straight-line Method is & allowed under GAAP?
- 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
Straight-line Method
[IFRS]
- Not permitted
How does Discount Amortization affect carrying value of a bond?
- Increases carrying value
How does a Premium affect carrying value of bond
- Decreases Carrying Value
Effective Interest Method is & Calc?
- 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
Bond Sinking Funds, kind of Asset?
- Generally a non-current (restricted) asset on the financial st. of the issuer.
Bond Sinking Fund:
Appropriation
- 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.
Conversion of the Bonds to Stock may be recorded under either:
- The BV method (US GAAP)
OR - Market Value Method (Not GAAP)
Book Value Method
[Convertible Bonds]
- 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.
Market Value Method
[Convertible Bonds]
- Views the conversion as culmination of the earnings process
- Thereby resulting is a Recognized Gain or Loss.
Premium
[Convertible Bonds]
- 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.
Book Value Method Upon Conversion
[Convertible Bonds]
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.
Bonds Sold with Detachable Stock Purchase Warrants
- Account for separately
Cash XXX
- — B/P XXX
- —-APIC-warrants XXX
Stock Warrant: To record the issuance of stock to the holder of the warrant:
- On Exercise date:
Cash XXX
APIC- warrants XXX
——C/S (at par) XXX
——-APIC XXX
Bond Issue Costs
[IFRS]
- Are not recorded as a separate asset.
- Are deducted from the carrying value of the liability & amortized using the effective interest method.
How are Bond Issuance Costs Recorded?
-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
Market Value Method for Convertible Bonds at Conversion Date
- 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)
