Long Term Liabilities Flashcards
Calculate amortization of Bond Liability
It is the difference between interest expense and cash interest paid
Positive for a discount bond
Negative for a premium bond
Calculate bond liability
PV of remaining future cash flows discounted at the market rate at issuance
How are bond proceeds recorded
Cash flow statement, financing
Explain how amortization works for discount and premium bonds
Discount
Coupon rate < Market rate at issuance
Recorded on BS at less than face value
The discount is amortized towards FV
Premium
Coupon rate > Market rate at issuance
Recorded on BS at more than face value
The premium is amortized towards FV
How do you calculate a gain or loss on the early redemption of a bond
When bonds are redeemed before maturity, a gain or loss is recognized equal to the difference between the redemption price and the carrying (book) value of the bond liability at the reacquisition date.
Calculate interest expense and explain how the size for discount and premium relative to coupon payments
Book value of the bond liability at the beginning of the period x bond’s yield at issuance.
Discount
more than coupon pmt
Premium
Less than coupon pmt
How do you identify a premium and discount bond?
Premium
Coupon Payment > YTM
Discount
Coupon Payment < YTM
What do debt covenants do?
Debt covenants are restrictions on the borrower that protect the bondholders’ interests, thereby reducing both default risk and borrowing costs. Covenants can include restrictions on dividend payments and share repurchases; mergers and acquisitions; sale, leaseback, and disposal of certain assets; and issuance of new debt in the future. Other covenants require the firm to maintain ratios or financial statement items at specific levels.
What is the key difference between a financing and operating lease?
A finance lease is a lease that transfers the benefits and risks of ownership to the lessee. A lease that does not transfer these benefits and risks is an operating lease.
Explain how financing and operating leases work in terms of recording assets and liabilities
Under both IFRS and U.S. GAAP, with a finance lease, the lessor removes the leased asset from its balance sheet and adds a lease receivable asset. The lessor reports the interest portion of the lease payments as income.
For an operating lease, the lessor keeps the leased asset on its balance sheet, reports lease payments as income, and reports depreciation and other costs as expenses.
What cash flow is a coupon payment
CFO
What cash flow is a bond redemption payment
CFF
What cash flow is lessee principal repament
CFF
