FAR-Bonds and Fair Value Flashcards
What is a debenture bond?
Unsecured bonds that are not supported by any collateral.
What is a serial bond?
A bond in which the principle matures in installments.
What is a bond sinking fund?
A bond sinking fund is a restricted asset of a corporation that was required to set aside money for redeeming or buying back some of its bonds payable.
What is a term bond?
Bonds that mature on a single date
When a bond is issued with a discount, how does interest revenue/expense, amount of amortization, and the bond carry value behave?
Interest revenue/expense GOES UP
Amount of amortization GOES UP
Bond carry value GOES UP
When a bond is issued with a premium, how does interest revenue/expense, amount of amortization, and the bond carry value behave?
Interest revenue/expense GOES DOWN
Amount of amortization GOES UP
Bond carry value GOES DOWN
The value of a bond is equal to which of the follow? (Two things)
Maturity value and present value of interest payments.
In what case does a bond not have a discount or premium AND the effective interest method is not used to measure interest expense?
When the fair value option is elected
How does the interest rate behave for a bond that was issued at a premium that is amortized using the straight-line method?
It goes up each year as the interest expense stays the same, but the bond carrying value goes down.
How does the interest rate behave for a bond that was issued at a discount that is amortized using the straight-line method?
It goes down each year as the interest expense stays the same, but the bond carrying value goes up.
If the carrying value of a bond goes up (or down) when amortizing a bond with the effective interest method, in what direction does interest expense/revenue move?
Interest expense/revenue will move in the same direction as the carrying value when using the effective interest method. This is because the interest expense/revenue is found by multiplying the carrying amount by the effective interest rate.
So when the carrying value goes up, interest expense goes up, when carrying value goes down, interest expense goes down.
When is a bond issued at a premium?
When the stated rate is higher than the effective rate. The premium occurs since more money is paid to obtain a high return than what is available in the market.
When is a bond issued at a discount?
When the stated rate is lower than the effective rate. The discount occurs since the stated rate is lower than what is available in the market.
How does amortization behave under both a premium and a discount under the effective interest method?
It goes up
If a note is issue at unreasonable terms, what are the criteria to find the present value of the note?
(1) Fair value of the property, goods, or services exchanged
2) Fair value of the note
3) Imputed Interest Rate
Stice, Earl K.; Stice, James D. (2013-03-12). Intermediate Accounting (Page 7-35). Cengage Textbook. Kindle Edition.
What items would make the terms of a note unreasonable?
No interest stated, the stated rate is too high or too low, or face amount is significantly different from sales price of services or goods involved in the exchange.
How is interest income calculated on a instrument that has an imputed interest rate?
CV*Imputed Interest Rate
How are the FV Factors found when only PV Factors are provided?
PV Factor + 1
What is the alternative method to calculated the Factor when no factors are available?
Future Amount/Present Amount
What is the alternative to method to calculate the Present Value amount?
Future Amount/Factor
How are Notes with a maturity of less than a year present valued?
At their face. Notes that are issued through the normal course of business that are due in less than a year are recorded at their face value
How many securities are issued with a convertible bond?
A convertible bond is one security. The convertibility feature is not valued.
When amortizing a bond with the effective interest method, how is the interest paid calculated?
Face value*Coupon Rate
When amortizing a bond with the effective interest method, how is the interest expense calculated?
Carrying value*Effective Rate
When amortizing a bond with the effective interest method, how is the amortized premium/discount calculated?
The difference between the Interest Paid and Interest Expense.
When amortizing a bond with the effective interest method, how is the unamortized amount calculated?
The difference between the Premium or Discount, and the Ammortized Premium/Discount
What are included in bond issue costs?
Printing and engraving of the bond certificates
Legal and accounting fees
Underwriter commisions
Promotion Costs
How are Bond Issue Costs treated? Are they expensed?
They are amortized
What is the difference between the Book Value Method, and the Market Value Method?
Book Value Method: No gain or loss. Plug is APIC
Market Value Method: Has gain or loss.
