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FAR Personal Flashcards > FAR Module 13B > Flashcards

FAR Module 13B Flashcards

0
Q

Define the contract rate

A

This is the rate stated in the bond indenture and is the percentage you agree to pay bondholders

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1
Q

When must you consider PV & TVM

A

Whenever the cash flows are greater than 1 year

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2
Q

What do you use the contract rate for?

A

Only use the contract rate to calculate the interest payment for each period. Do not use the contract rate when looking up/calculating PV factors

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3
Q

The Stated Rate is another term for what?

A

The contract rate

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4
Q

The Coupon Rate is another term for what?

A

Contract rate

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5
Q

The Nominal Rate is another term for what?

A

The contract rate

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6
Q

The Bond Rate is another term for what?

A

Contract rate

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7
Q

The Face Rate is another term for what?

A

The contract rate

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8
Q

What is the market rate?

A

This is the rate that all other bond purchasers could get for a bond like yours selling in the market

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9
Q

The yield is another term for what?

A

The market rate

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10
Q

The YTM is another term for what?

A

The market rate

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11
Q

The Effective Rate is another term for what?

A

The market rate

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12
Q

The Real Rate is another term for what?

A

The market rate

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13
Q

Bonds sell at par when…

A

The contract rate = the market rate

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14
Q

Bonds sell at a discount when…

A

The contract rate is lower than the market rate

This is because you are offering to pay a lower interest rate than the buyer could find elsewhere for a similar bond on the market. To entice them to buy your bond anyway you sell the bond at a discount.

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15
Q

Why do bonds sell at a discount

A

This is because you are offering to pay a lower interest rate than the buyer could find elsewhere for a similar bond on the market (contract rate is less than the market rate). To entice buyers to buy your bond anyway you sell the bond at a discount.

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16
Q

A bond sells at a premium when…

A

The contract rate is higher than the market rate

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17
Q

Why do bonds sell at a premium

A

This is because you are offering to pay a higher interest rate than the buyer could find elsewhere for a similar bond on the market (contract rate is greater than the market rate). Many buyers want to buy your bond so you have the power to sell the bond at a premium.

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18
Q

When calculating/looking up PV factors what rate do you use?

A

ALWAYS use the market rate

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19
Q

What term word is used to describe unsecured bonds

A

A debenture bond

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20
Q

What term word is used to describe bonds with multiple due dates of usually equal amounts

A

A serial bond

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21
Q

What term word is used to describe bonds where the entire amount is due at one maturity (not multiple maturity dates)

A

A term bond

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22
Q

T/F

On the exam you assume everything to be material

A

TRUE

unless told otherwise, everything is material

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23
Q

Interest payments on bonds are recorded where

A

On the multiple step income statement under “minus other expenses/losses”

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24
Q

When looking at bonds payable, what point of view are you taking?

A

You are the issuer and are thus selling the bonds and paying them off

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25
Q

Why is the interest due date important?

A

If interest is due on 6/30 and 12/31 you will accrue interest and make the cash payment on the same day at the same time

If interest is due on 7/1 and 1/1 you accrue interest on 6/30 and 12/31 and have an interest payable that is then paid off with a cash payment the following day

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26
Q

T/F

in FAR we often use the Future Value factor

A

FALSE

in FAR we never use the FV factor! Only the PV factor

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27
Q

When looking at bond investments, what point of view are you taking

A

You are buying the bonds and thus receiving payments. You are the investor

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28
Q

As an issuer, what JE is made to show a bond issue

A

Debit Cash
Debit Bond Disc
Credit Bond Payable
Credit Bond Premium

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29
Q

As an issuer, what J/E is made to recognize the first cash payment and the corresponding amortization

A

Debit interest expense
Debit bond premium
Credit Cash
Credit bond discount

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30
Q

As an investor, what JE is made to show a bond issue

A

Debit bond investment

Credit Cash

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31
Q

As an investor, what J/E is made to recognize the first cash payment and the corresponding amortization

A

Debit cash
Credit interest revenue
Debit/Credit bond investment

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32
Q

If bonds are purchased between interest payment dates how is the initial J/E adjusted?

A

The purchaser will also include accrued interest through the purchase date in the total cash paid for the bonds (this is so that at the end of the first period they can be paid the normal interest payment and it will net out properly)

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33
Q

T/F

always credit bonds at face value

A

TRUE

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34
Q

How are bond issue costs treated

A

As deferred charges. They are amortized on a straight-line basis over the life of the bond

35
Q

Give examples of bond issue costs (7)

A

Printing, engraving, registering with the SEC, advertising, doing financial statements, auditing financial statements, underwriter costs

36
Q

Where do bond issue costs go on the balance sheet

A

Under “other assets” as a Deferred charge

37
Q

Where does amortization expense of bond issue costs go on the financial statements

A

On the multi step income statement as a “minus other expenses and losses”

38
Q

What are the two methods of amortization of bond issue costs

A

Effective interest method

straight-line method

39
Q

Which method of amortization of bond issue costs has interest revenue and expense stay constant each period

A

Straight-line method

40
Q

Which method of amortization of bond issue costs has changing interest revenue and expense each period

A

Effective interest method

41
Q

Which method of amortization of bond issue costs has a constant interest rate each period

A

The effective interest method

42
Q

Which method of amortization of bond issue costs has changes in the interest rate in each period

A

The straight-line method

43
Q

Under the effective interest method how does interest revenue or expense affect both the discount and the premium

A

Discount increases each period

Premium decreases each period

44
Q

Under the effective interest method how does the amount of amortization affect the discount and premium each period

A

Discount increases each period

Premium increases each period

45
Q

Under the effective interest method how does the carrying amount of bonds payable or investments in bonds affect the discount and premium each period

A

Discount increases each period

Premium decreases each period

46
Q

What are the two approaches when accounting for bond conversions

A

Valuing the transaction at cost

valuing the transaction at market

47
Q

What approach is most common when accounting for bond conversions

A

Valuing the transaction at book value

48
Q

To induce conversion of convertible bonds firms sometimes change the original conversion privilege or give additional consideration to the bondholders this is known as a sweetener. How should a sweetener be recognized

A

The fair value should be recognized as an expense upon conversion

49
Q

Convertible bonds affect what areas of a balance sheet equation

A

The assets and liabilities

50
Q

Bonds with detachable warrants affect what areas of the balance sheet equation

A

Assets, liabilities, and stockholders equity

51
Q

T/F

under US GAAP when you sell bonds with detachable warrants you can split up the cash proceeds between liabilities and stockholders equity

A

FALSE

you MUST split these up

52
Q

What are the two rules for allocating between liabilities and stockholders equity when dealing with detachable stock warrants

A

1) if given the fair value of both, allocate the CV based on a relative percentage of the FV
2) if given fair value for only one put it there and plug the other one

53
Q

all gains and losses resulting from the extinguishment of debt should be recognized when

A

In the period of extinguishment

54
Q

When dealing with an extinguishment of debt what side of the journal entry will be a loss or gain

A

Debit loss

Credit gain

55
Q

How are bond sinking funds classified on the financial statements

A

As a long-term investment on the balance sheet this is a noncurrent asset

56
Q

What does a bond sinking fund do

A

It accumulates cash in order to pay back a bond principal

57
Q

How much money is put in a bond sinking fund

A

The terms are described in the bond indenture saying how much money must be put in the sinking fund each period to ensure that there will be money to pay off the bonds when they become due at maturity

58
Q

What is the five-year disclosure rule for bond sinking funds

A

You must disclose the sinking fund requirements and bond maturities for five years after the balance sheet date

59
Q

T/F

For ease of calculations you can net the sinking fund balance with the bond payable balance

A

FALSE

the sinking fund is a L/T asset
The bond payable is a L/T liability
NEVER SHALL THE TWO MEET

60
Q

What are the three types of bonds as investments

A

Trading, available for sale, held to maturity

61
Q

How are trading bonds treated

A

Gains and losses go to income from continuing operations.

This will either be in the section “plus other revenue and gain” or “minus other expenses and losses”

62
Q

How are available for sale bonds treated

A

Usually you do not elect the fair value option and in that case the gain and loss goes to other comprehensive income, net of tax.

If you do elect the fair value option treat available for sale investments like trading investments are treated

63
Q

How are held to maturity investments treated

A

You do not mark held to maturity investments at fair value because fair value is irrelevant for held to maturity therefore you do not have unrealized gains or losses and you keep these investments at carrying value.

If by some chance you do elect the fair value option, treat held to maturity investments like trading investments are treated

64
Q

Under IFRS convertible bonds and bonds with detachable warrants are referred to with what terminology

A

Compound instruments

65
Q

Under IFRS the fair value option is known as what

A

The fair value through profit or loss option (FVTPL)

66
Q

T/F

When calculating net proceeds to be received from an issuance you subtract out the bond issuance costs

A

TRUE

67
Q

When converting convertible bonds into stock, what journal entry will you make

A 
Debit BP
Debit Premium on BP
Credit Discount on BP
Credit Common Stock
Credit APIC
68
Q

A gain or loss on redemption of bonds is calculated how

A

Cash paid - Net BV of Bonds

69
Q

When you issue bonds payable with a nominal interest rate that is less than the market interest rate what affect does this have on the Balance Sheet

A

Increase bond discount

Increase bond payable

70
Q

When you issue convertible bonds (which are common stock equivalents) for an amount in excess of the bonds face amount what effect does this have on balance sheet accounts

A

Increase bond premium
increase bonds payable

This does not affect common stock or APIC because of the mutually exclusive option of the holder

71
Q

When you issue common stock as a conversion from bonds what effect does this have on the balance sheet accounts

A

Increase common stock
Increase APIC

reverse the previous BP entry. This will mean a decrease in either a discount or premium as well as a decrease in BP

72
Q

When you issue bonds with non-detachable warrants for an amount equal to the face amount of the bonds and the stock warrants do not have a determinable value what effect does this have on balance sheet accounts

A

Increased bond payable

73
Q

When you issue bonds with detachable stock warrants for an amount equal to the face amount of the bond and the stock warrants have a determinable value how does this affect the balance sheet accounts

A

Increase bond discount
Increase bonds payable
increase APIC

There is a discount because you received an amount equal to the face amount of the bonds but did not receive an additional amount for stock warrants

74
Q

When you redeem a bond issued at a discount for an amount that was over 100% of the face value how does this affect the balance sheet accounts?

This means that the bond was sold at a discount. When the bond are redeemed the bonds payable and the discount account must be removed from the records. In this situation the net carrying amount is less than the reacquisition price. Therefore there is a loss on the extinguishment of debt

A

decrease in bond discount
decrease in bonds payable
decrease in retained earnings (The loss on extinguishment of debt is considered an ordinary loss and will appear under retained earnings)

75
Q

When you issue a bond payable with a nominal rate of interest that is higher than the market rate what balance sheet accounts are affected

A

Increase bond premium

Increase bonds payable

76
Q

When you call a bond that was issued at greater than par when the market value of the bond is less than the carrying value how does this affect the balance sheet accounts

In other words the net carrying value is greater than the market value of the bond or the reacquisition price. Therefore there is a gain on the redemption of the bond

A

Decrease bond premium
decrease bond payable
increase retained earnings

77
Q

T/F

Bond issue costs should be treated as deferred charges and amortized over the life of the bond

A

TRUE

78
Q

T/F

Early extinguishment of debt is treated as an extraordinary item

A

FALSE

Early extinguishment of debt does not receive routine treatment as an extraordinary item. It must meet the test for an extraordinary item (infrequent and unusual) in order to receive extraordinary treatment

79
Q

T/F

losses from extinguishment of debt should be amortized over the remaining life of the debt

A

FALSE

Losses should be recognized in the period of extinguishment

80
Q

T/F

The straight-line method of amortization should be used for bonds due in less than five years

A

FALSE

The effective amortization method should be used

81
Q

T/F

Bonds that mature on a single date are called serial bonds

A

FALSE

These are called term bonds

82
Q

T/F

The effective interest is calculated by multiplying the maturity value of the bond by the coupon rate

A

FALSE

The effective interest is calculated by the carrying value times the effective rate

83
Q

T/F

A bond premium represents a reduction of interest expense on the books of the issuer

A

TRUE

As the premium is amortized interest expense is decreased

84
Q

T/F

when the contract or coupon rate is greater than the effective rate the bonds will sell at a premium

A

TRUE

85
Q

What happens to a sinking fund when periodic additions are made to the fund and when revenue is earned on the investment held in the fund

A

The balance increases

86
Q

What happens to a sinking fund when cash is used to purchase investments

A

The components of the fund change but the total fund balance is not affected

FAR Personal Flashcards (34 decks)

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