FAR 5 & 6 Flashcards
How do you calculate the selling price of a bond when given present values calculations?
you must get the present value of ordinary annuity for the interest payments, which is usually semiannually
then you must get the present value of a sum at the the same term
you must use the market rate, not stated rate to determine the present values, also the interest payments are usually semi annually so you must divide the interest percentage by 2
How do you handle bonds with issuance costs?
proceeds are recorded net of bond issue costs, which means you take it out of cash received
you then lump it into the discount or premium on bonds and must calculate new effective interest rate with bond issue costs and get new interest expense
dr cash - issue costs
dr disc/premium on bond + issue costs
cr bond payable
the borrower and investor will have different amounts. investor not affected by bond issue costs.
How are bonds handled issued between interest dates?
the accrued interest is based on actual cash paid the face/coupon rate. that accrued interest must be added to the selling price of bond.
dr cash selling price plus accrued interest dr disc on b/p cr b/p cr bond interest exp or payable discount on b/p is a plug
reverse on the bond payable on first interest payment
dr bond int. exp
dr bond int payable (reverse from above accrued interest)
cr cash
cr discount on bond “plug”
During troubled debt restructuring, how do you determine the amount of assets transferred?
the assets are transferred using their FV, not CV. then gain or loss is recognized.
What is an Asset retirement obligation? how is it accounted for? what is the initial JE to book the ARO?
certain assets that have environmental impact or are affected by other regulations, there will be significant costs to dispose of the asset. These future costs need to be accounted for as an “asset retirement
obligation
assets base is depreciated over life
ARO is increased through accretion expense
dr asset retirement cost xx this amount will be the present value of the future costs
cr asset retirement obligation
accretion exp increases the obligation each year, which creates an in accretion exp each year
What is the end of year JEs for ARO?
recognized depreciation exp and accretion exp
dr dep exp ARC/useful life
cr accum. dep
dr accretion exp ARO carrying value x rate
cr ARO