FAR - Financial Statement Acct - Long-Term Debt Flashcards
2 methods to record a note discount/premium
Gross and net
1) market/yield/effective rate > stated/coupon rate =
2) stated/coupon rate > mkt/yield/effective rate =
3) mkt/yield/effective rate = stated/coupon rate =
1) discount
2) premium
3) face value
non-interest bearing note?
zero interest paid for during period, interest included in amount paid at maturity date, deeply discounted note.
total interest expense related to non-interest bearing note?
total payments - amount borrowed
market rate = ?
stated rate = ?
difference = ?
market rate = interest expense
stated rate = interest payment
difference = discount/premium
2 methods to amortize a note premium/discount?
1) Straight-line
2) Effective Interest
amount borrowed on an installment note issued at discount?
Product of the periodic payment and the annuity factor for the term of the note and the yield rate
amount of interest recognized for a period on a note calling for a face amount due at maturity, issued with an effective interest rate not equal to the stated rate?
Product of effective rate at date of issuing the note and the principal balance at the beginning
principal amount of a noninterest-bearing note?
Present value of the face amount discounted at the yield rate
When is the straight-line method not allowed for notes payable accounting?
Installment notes, and when the yield and stated rates are materially different.
“interest-bearing note payable.”?
note with explicit interest element
reported amount of a note calling for a face amount due at maturity, issued with an effective interest rate not equal to the stated rate?
Present value of remaining cash flows discounted at the effective rate.
distinction between notes payable and accounts
payable?
1) time length is extended
2) explicit interest element
net note balance for a note issued at a discount?
Face value - unamort discount
amount of interest recognized for a period on an installment note (one requiring equal periodic payments that include both principal and interest)?
Product of effective rate at date of issuing the note and the principal balance at the beginning
amount of the periodic payment for an installment note issued at discount?
Face value divided by the annuity factor for the term of the note and the stated rate
amount of noninterest revenue recognized over the term
Define “discount on note” for a note exchanged for cash and other privileges.
true/false
Must use market rate of original issuance regardless of the fluctuation of the market rate
True
true/false
If the stated and market rates of interest are different, the market rate is used to compute the book value of the debt.
true
true/false
interest expense reflect mkt rate*
and note face value should be valued at PV**
interest payable reflects stated rate*****
true
Annuity due?
payment required at the beginning of the period
true/false
Bankruptcy law specifies that secured creditors are to be satisfied before any assets are paid to unsecured creditors
true
effective interest rate for the year (only amortization of interest method)
total interest paid / net amount loaned (less fees)
true/false
interest must be deducted from periodic payments to result in reduction in principal figure, the more the payments, the less the interest, and bigger the principal amount
Reduce note payable balance with the following figure = payment - interest = principal
accrue interest only on the periodic payment made, not entire balance
true
true/false
use market rate to assess the present value of loans
true
Pension cost interest is a component of pension expense. It is not separately reported as interest expense. It is the growth in the projected benefit obligation for the period.
true
Postretirement healthcare benefits interest is a component of postretirement benefit expense. It is not separately reported as interest expense. It is the growth in the accumulated postretirement benefit obligation for the period.
Interest incurred to finance construction of machinery for own use is capitalized interest and becomes part of the machinery under construction. The cost is never reported as interest. Instead, the cost is included in depreciation on the asset during its useful life.
noninterest-bearing note actually causes interest to be paid by the maker. The term noninterest-bearing means that the note carries no stated rate of interest. The face value of the note includes interest however, and exceeds the principal amount of the note (the amount borrowed).
true
define bond
Define “serial bonds.”
Define “issuance date.”
Define “bond date.”
secured bonds
method is required for premium/discount amortization?
financial debt instrument requires periodic interest payment and the principal will be due in the future
bonds that mature at regular or staggered intervals.
issuance date of bond
1st possible issuance date
claims to specific assets
effective interest
three general aspects about the valuation of all long-term liabilities.
- Initially recorded at the present value of future cash flows;
- Interest and amortization are recognized at the market interest rate the date the liability was established;
- Interest expense equals the liability balance at the beginning of the period times the market rate of interest the date the liability was recorded.
bond carrying value - bond face value =
bond premium amort = interest exp - interest paid
interest exp = yield rate X bond carrying value
premium
true/false
The discount increases the total interest over the term. The discount is additional interest because it represents the difference between face value and amount borrowed. The firm borrowed an amount less than the amount required to be paid at the end of the term.
true
true/false
always record bonds payable at face value, if discount/premium present, add additional account into entry and plug with cash
true
cash interest paid =
interest expense =
stated rate X face value
market rate X carrying value
Serial bonds mature at regular intervals rather than on one single date. Debenture bonds are not secured but rather are backed only by the general credit of the issuing firm. Debenture bonds can be serial bonds. Therefore, the total amount of debenture bonds equals the total of the unsecured bond issues
true
future value of $1 is the reciprocal of the present value of $1.
true
Both the registered debentures and collateral trust bonds are term bonds. A term bond matures on a single date. Although the bonds may be called or converted, these events may not occur, in which case they would be retired all on one date.
The subordinated debentures are serial bonds that mature in $30,000 amounts beginning 1997. They do not all mature on the same date.
true
SL method recognizes the average amount of discount amortization every period, which must be larger than under the effective interest method early in the bond term. Thus, interest expense under the SL method results in higher interest expense, lower retained earnings, and higher bond carrying value because more discount is amortized early in the bond term than under the effective interest method.
true
convertible bond
callable bond
redeemable bond
serial bond
single maturity (term) bond
secured bond (debenture)
unsecured bond (debenture)
sinking bond
- can be converted into capital
- issuer can retire callable bonds before maturity at a specified price
- bondholder can require a redeemable to retire early, pay off at call value to end the bond with interest
- serial bond matures serially/regular or staggerly, DOESNT mature at 1 date
- principal paid gradually, mature at 1 date
- secured bond issue has claim to specific assets, unsecured creditor, mature at 1 date
- only backed by credit rating of the issuing, mature at 1 date
- issuing firm is required to invest cash each year into a restricted fund for the purpose of retiring the bonds, mature on one date
amortized discount increases the bond carrying value while the amortized premium decreases the bond carrying value
true
Accrued interest is reported separately from the net bond liability.
true
Serial bonds mature serially according to a schedule set in the bond contract. At each date, a portion of the bond issue is paid off (matures) until the entire face value of the issue is retired. Each portion is a percentage of the total face value of the issue. Serial bonds are designed to reduce the risk, to the bondholder, of default by the issuing firm.
True, therefore serial bonds are like installments
if semi-annual, divide years in half and percentage in half to make sure to get the accurate PV formula to calculate the correct selling price of the bond
NOTE
issuance between interest dates -> accrued interest payable, between bond date and bond issuance date
bond proceeds
true
sum of bond price + accrued interest
issuance between dates:
1) bond price excludes interest
2) premium/discount unaffected
3) bond term is lesser than b4 by time period of accrued interest
affects overall time period -> change S/L formula
true
use stated rate to calculate accrued interest
Bond issue costs
acct, legal, printing, underwriting fees, promotion costs, costs to issue bonds
capitalized to deferred charge (asset) account/amortized as expense over bond term using the straight line method
How many months of interest are collected at issuance when bonds are issued between interest dates?’
length of a bond term when bonds are issued between interest dates?
Number of months between the most recent interest payment date and the date of issuance.
Period of time from issuance date to maturity date.
When bonds are sold between interest dates rather than on the bond date, the straight-line method will use a smaller number of months to amortize the discount or premium.
true
