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ACCT 101 > Lecture 17 > Flashcards

Lecture 17 Flashcards

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1
Q

similarity b/w long-term notes and bonds

A

borrower’s obligation is to make payments in accordance w/ contractual agreement

principal & interest

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2
Q

bond

A

2 kinds of cash payments
1. lump sum payment due on day the contract expires (par value, face value, maturity value, principal amount)

  1. equal payments @ regular intervals over contract term; determined by par value and coupon (nominal, stated, contractual) rate
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3
Q

coupon payment =

A

par value * (nominal coupon rate / #coupon payments per year)

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4
Q

issue price

A

price @ which bond originally issued

amount received by firm from lenders @ date of issue

PV of future maturity payments & coupon payments discounted at market rate of interest @time bond was issued

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5
Q

historical interest rate

A

interest rate the market demanded when the bond was issued

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6
Q

historical interest rate per period =

A

annual market rate @issuance / # payments per year

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7
Q

current interest rate

A

interest rate @which the bonds are currently trading in the market

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8
Q

premium (discount) at issue =

A

issue price - par value

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9
Q

net book value =

A

PV of all remaining future cash flows using the HISTORICAL interest rate

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10
Q

current market value =

A

PV of all remaining future cash flows using the CURRENT market interest rate

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11
Q

interest expense (per compounding period) =

A

NBV @start of period * Historical interest rate per period

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12
Q

historical interest rate =

A

(Issue price? / Market price) - 1

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13
Q

effective interest method

A

requires that interest expense each period is based on the effective interest rate implicit in the lending arrangement when it was initiated (historical market interest rate)

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14
Q

proceeds at issuance depend on…

A

FV of bond
Coupon interest rate
effective interest rate at issuance (market rate when issued)

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15
Q

Cash proceeds =

A

PV Principal + PV Annuity Coupon

*use semi-annual coupon rate

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16
Q

Journal entry for bonds issued @par

A

cash

   bonds payable
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17
Q

bond issued @discount

A

when market rate > coupon rate

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18
Q

journal entry for bond issued @discount

A

cash
discount on bonds payable

   bonds payable
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19
Q

interest payments for bonds not issued at par

A
  1. cash paid - does NOT change

2. interest expense - CHANGES over time

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20
Q

cash payments =

A

face value * coupon rate

21
Q

interest expense =

A

NBV * historical rate

22
Q

journal entry for interest payment @par

A

int exp

  cash
23
Q

journal entry for interest payment @discount

A

int exp

   cash
   discount on bonds payable
24
Q

journal entry for bond retirement

A

bonds payable

   cash
25
Q

NBV for bond @discount =

A

face value - total unamortized discount

26
Q

bond issued @premium

A

when market rate

27
Q

journal entry for bond issued @premium

A

cash

    bonds payable
    premium on bonds payable
28
Q

the coupon rate is used ONLY FOR…

A

determining coupon payment, NOTHING ELSE!

29
Q

NBV of bond issued @premium =

A

face value + total unamortized premium

30
Q

early retirement of debt

A

if amount paid to retire LT liability is different from book value, firm recognizes a gain or loss from transaction

31
Q

journal entry for interest payments @premium

A

int exp
premium on bonds payable

   cash
32
Q

journal entry for gain on debt retirement for bond issued @discount

A

bonds payable

    cash
    gain on debt retirement
    discount on bonds payable
33
Q

interest expense for par

A

= interest payments

34
Q

interest exp for discount

A

> interest payments

35
Q

interest exp for premium

A
36
Q

balance sheet carrying value for par

A

= face value

37
Q

balance sheet carrying value for discount

A

= face value - discount

38
Q

balance sheet carrying value for premium

A

= face value + premium

39
Q

interest payments

A

USE COUPON RATE FOR ALL 3 TYPES

40
Q

interest rate for par

A

coupon = market

41
Q

interest rate for discount

A

coupon

42
Q

interest rate for premium

A

coupon > market

43
Q

cost of borrowing for all 3 types

A

effective rate (market rate at time of issuance)

44
Q

cash proceeds - par

A

= face value

45
Q

cash proceeds - discount

A
46
Q

cash proceeds - premium

A

> face value

47
Q

discount on bonds payable is a ___ acount

A

contra liability

48
Q

EB book value of bond

A

BB + Int exp - coupon payment

ACCT 101 (20 decks)

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