Long-Term Liabilities and Bonds Payable Flashcards
What are convertible bonds?
Bonds that are convertible into common stock of the debtor at the option of the bondholder
What happens in a nondetachable warrant?
Convertible bond itself must be converted into capital stock
What happens in the detachable warrant?
Bond is not surrendered upon conversion
What are term bonds?
Bonds that have a single fixed maturity date
When is the principal paid on term bonds?
At the end of this term/period
What are serial bonds?
Pre-numbered bonds that the issuer may call and redeem a portion by serial number
What denominations are bonds noted in?
$1,000
What is a contract for purchase of bond?
Indenture
What is the coupon rate?
The stated interest rate on the bond
Calculation for bond interest?
Coupon rate x face
What amount is the principal payoff?
Full face amount
What is the premium/discount the result of?
buyer and seller “adjusting” the coupon rate to the prevailing market rate of interest
What does the face value of the bond consist of?
PV of future interest payments and PV of principal
What impact does a discount have on par value?
Direct reduction
What impact does a premium have on par value?
Addition to the par value
How are bond issue costs recorded?
A deferred charge and amortized using straight-line method
How are bond issue costs recorded under IFRS?
As a reduction of from the carrying value of the liability and amortized using the effective interest method
Calculation for interest expense?
(Face value x stated interest rate) - Premium amortization or plus discount amortization
What method is used for the amortization of unamortized discounts/premiums under GAAP & IFRS?
Effective interest method
Calculation for amortization of the discount under the effective interest method?
Interest expense - Cash interest paid at the stated rate
Calculation of interest expense under the effective interest method?
Carrying value at the beginning of the period x Effective interest rate
Calculation of amortization of the premium under the effective interest method?
Cash interest paid at the stated rate - interest expense
Which method has the higher carrying amount for discount premiums?
Effective interest method
Which method has the lower carrying amount in bond discounts?
Effective interest method
How is the sinking fund classified?
Non-current (restricted) asset
How does principals mature in serial bonds?
Mature in installments
What amortization methods are used for serial bonds?
Effective interest method and bonds outstanding method
What type of warrant is a convertible bond?
Nondetachable warrant
Is a gain or loss recognized under the book value method for convertible bonds?
No
What happens at conversion in book value method for convertible bonds?
Bond payable and related premium or discount are written off and common stock is credited. Additional paid in capital is credited for the excess of the bond’s carrying value over the stock’s par value less any conversion costs
Is a gain or loss recognized under the market value method for convertible bonds?
Yes
How is the recognized gain or loss calculated for convertible bonds?
Market value of the stock - Book value of the bonds
What happens at conversion in market value method for convertible bonds?
Bonds payable and related premium are written off, and common stock is credited. The credit to additional paid in capital is the excess of the market price of the stock over par value.
