Far - Deck 3 Flashcards
total cash proceeds = ……
= bond issue proceeds + accrued interest
accrue int for period b/w interest pmt date and issuance date
Need to acct for the portion of period prior to issuance when int was still accruing
Does interest method have an effect on bond’s CV on maturity date?
No - CV will always equal face amt (aka maturity value) regardless of amort method used
What to do if a company incorrectly uses SL amort instead of the effective interest method?
Calc CV using both methods
Evaluate whether the CV is over or understated based on the correct effective interest meethod
Stated vs Effective/mrkt rate for disc? for prem?
Discount = Mrkt > Stated = Int exp > int paid
Premium = Mrkt < stated = Int exp < int paid
Int paid vs int exp?
int pay = FV @ beg of period X contractual IR
int exp = CV @ beg of period X effective IR
Where are G/Ls on bond retirements reported?
Inc from continuing ops, NOT OCI
What happens in a troubled debt restructuring?
Step 1: When assets are transferred in a troubled debt restructuring, the asset (Real estate) is adj to FV and an ordinary G/L recorded.
Step 2: G/L on restructuring is recorded as the diff b/w liab and FV of asset transferred
Steps to calc amt of G/L (before taxes) from debt restructuring
- Cal Net CV = principle + interest accrued
- Subtract settlement cash price
- Det if G/L on debt restructuring
Facts of callable bonds
Issuer/borrower more likely to call a bond to refinance the debt @ lower rates
Call price often set at a premium to par
Provides an option for the issuer (not the bondholder), whereas a puttable bond provides an option to bondholder
Bondholders typically require a higher rate of return to compensate for risk
OWNES Criteria to be classified as a finance lease criteria for the lessee (and a sale-type lease by the lessor)
***has to meet at least 1 criteria
O Ownership transfers at the end of the lease
W Written purchase option the lessee is reasonably certain to exercise
N NPV of minimum lease pmts = FV of asset (approximately 90% of FV of leased property)
E Lease term = major part (75%) of asset useful life
S Asset is specialized such that it has no alternative use to the lessor
What is all included in lease pmts?
PV of fixed pmts, var pmts, exercise price of purchase option, termination penalties, and the probable amt owed of the guaranteed residual
How does lessee record an operating lease?
As a lease exp using the SL basis
What happens if variable pmts are known at the beg of the lease term?
var pmts will be used to calc the initial PV of the lease liab
What rate should be used when calculating PV of lease pmts?
Lessor’s rate if known
How should leasehold improvements be recorded?
They should be amortized over the SHORTER of the life of the improvements or the remaining life of the lease
Start w/ F5-M1
