Liabilities Flashcards
What do bond issuance costs do?
Reduce the cash received from the bond issuance and are deducted from the carrying value of the liability
Bond issuance costs affect the net proceeds from issuing bonds.
What is the effect of failing to record premium amortization on interest expense?
Interest expense would be overstated
Failing to amortize the premium means not recognizing the reduction in interest expense.
What is the effect of failing to record premium amortization on bond carrying value?
Bond carrying value would be overstated
The carrying value is reduced by the amortization of the premium.
If there is no premium or discount to amortize, what does interest expense equal?
Interest payable
This is applicable for par value bonds.
What type of bonds mature in installments
Serial bonds are pre-numbered bonds that the issuer may call and redeem a portion by serial number.
interest expense each year for a discount bond is equal to
interest payable plus the amortization of the discount
The seller will book the transaction as a financing arrangement when the repurchase price
is equal to or greater than the original sale price and the expected market value
Variable lease payments not included in the lease liability are treated as
cash outflows from operations and will therefore have a negative impact on bottom-line cash flow from operations.
Which of the following statements regarding bond amortization is incorrect for a premium bond?
A. An equal amount for premium on bond payable is credited for amortization each period under the straight-line method. B. Interest expense decreases each period over the life of the bond using the effective interest method. C. Interest expense is less than interest payable each period using straight-line and effective methods. D. The overall amortization is the same using both the straight-line and the effective interest methods.
Choice “A” is correct. Although the straight-line method does result in equal amortization every period, the premium on bond payable account is debited (rather than credited).
The gain or loss on bond retirements is reported in
income from continuing operations, not in other comprehensive income
If settlement price is greater than the face value of the debt and the face value is greater than the book value. Therefore, the settlement price is greater than the book value and you would
Recognize a loss
Rule: All costs associated with the issuance of bonds should be
amortized over the “outstanding” term of the bonds.
Ending ARO
= Beginning ARO + PV of new ARO + Accretion expense − ARO settled during the period
