LONG-TERM DEBT Flashcards
What method is required for premium/discount amortization?
Effective interest method.
Define “bond.”
A financial debt instrument that typically calls for the payment of periodic interest (although a zero-coupon bond pays no interest), with the principal being due at some time in the future.
When are bonds sold at a discount?
When stated rate
When are bonds sold at a premium?
When stated rate > market rate.
Define “bond date.”
The first possible issuance date.
Define “secured bonds.”
Bonds that have a claim to specific assets.
Define “serial bonds.”
Bonds that mature at regular or staggered intervals.
Describe three general aspects about the valuation of all long-term liabilities.
- Initially recorded at the present value of future cash flows; 2. Interest and amortization are recognized at the market interest rate the date the liability was established; 3. Interest expense equals the liability balance at the beginning of the period times the market rate of interest the date the liability was recorded.
Define “maturity date.”
The date the maturity value is paid, the end of the bond term.
Define “issuance date.”
The date the bonds are actually issued.
What is the length of a bond term when bonds are issued between interest dates?
Period of time from issuance date to maturity date.
How are bond issue costs accounted for?
Capitalized as a noncurrent deferred charge (asset account) and amortized to expense over the term of the bonds using the straight-line method.
Define “bond issue costs”.
The costs of printing, registering, and marketing the bonds.
How many months of interest are collected at issuance when bonds are issued between interest dates?
Number of months between the most recent interest payment date and the date of issuance.
Define “bond proceeds.”
The sum of the bond price and any accrued interest.
Define “stated rate.”
Rate listed on the bond and used to calculate accrued interest.
What is the international treatment of debt issue costs?
Reduction in the proceeds from the debt.
Is the fair value option for financial liabilities required and to what securities is it applied?
It is an option (not required) and can be applied to any and all financial liabilities.
How is interest expenses on the current line of an effective interest bond amortization schedule computed?
Multiply one-half the yield rate at date of issuance by the book value of the bond issue on the line above the current line.
What is the income statement effect of the fair value option applied to financial liabilities?
Recognize gain or loss for the change in the fair value adjustment of the liability during the period.
What is the balance sheet effect of the fair value option applied to financial liabilities?
Report liability at fair value.
How is total interest expense for a bond issue using an effective interest bond amortization schedule (assume a premium) computed?
Sum of the cash interest column less sum of amortization of premium column.
What is the international applicability of the fair value option?
Limited to liabilities that are part of a group with financial assets managed together.
How should the exercise of detachable warrants be accounted for?
Debit cash for exercise price, debit detachable warrants, credit common stock and additional paid in capital (APIC).
How should the issuance of bonds with detachable warrants be recorded when the market value of both are known?
Proceeds are allocated to eachissue based on the respective fair market values of the securities.
What is the purpose of detachable stock warrants?
To increase marketability of bond issue.
How should bonds with detachable warrants be accounted for after issuance?
Unaffected by warrants; amortize premium or discount.
How should the issuance of bonds with detachable warrants be recorded when only one market value is known?
Proceeds equal to the fair market value are allocated to that security, and the incremental proceeds are allocated to the remaining security.
What is the market value method of recorded converted debt?
The more reliable of market value of the stock or bonds is allocated to the capital stock account and contributed capital in excess of par account. A gain or loss is recorded equal to the difference between the total market value recorded and the remaining book value of the bonds.
What method of recording converted debt does not recognize a gain or loss?
Book value method.
What is the book value method of recording converted debt?
Remaining book value of the bonds is transferred to the capital stock account and contributed capital in excess of par account. No gain or loss is recorded.
When a convertible bond is issued, how are the proceeds treated?
The same as a nonconvertible bond. Nothing allocated to the conversion feature.
What is the accounting treatment for convertible bonds with a beneficial conversion feature?
The excess of fair value of the stock to be issued upon conversion (measured at the date of issuance) over the face value of the bonds, is allocated to owners’ equity.
Bonds are unaffected by conversion feature until what point in time?
Until conversion takes place.
What is the accounting treatment by the issuer for additional consideration paid to induce conversion of convertible bonds?
Recognize expense for the fair value of the additional consideration.
What amount is allocated to owners’ equity on issuance of convertible bonds that can be settled in cash?
Issuance price less the present value of the bonds using the prevailing rate on similar bonds.
List the three key elements of liabilities.
- Probable future sacrifice of economic benefits; 2. Obligations to transfer assets or provide services in the future; 3. Result of past transactions or events.
Which liability requires more future cash payments: a current liability reported at $2 million or a noncurrent liability reported at $2 million?
Noncurrent liability requires more future cash payments.
