Long-Term Liabilities and Bonds Payable

Question 1

What are convertible bonds?

Answer 1

Bonds that are convertible into common stock of the debtor at the option of the bondholder

Question 2

What happens in a nondetachable warrant?

Answer 2

Convertible bond itself must be converted into capital stock

Question 3

What happens in the detachable warrant?

Answer 3

Bond is not surrendered upon conversion

Question 4

What are term bonds?

Answer 4

Bonds that have a single fixed maturity date

Question 5

When is the principal paid on term bonds?

Answer 5

At the end of this term/period

Question 6

What are serial bonds?

Answer 6

Pre-numbered bonds that the issuer may call and redeem a portion by serial number

Question 7

What denominations are bonds noted in?

Answer 7

$1,000

Question 8

What is a contract for purchase of bond?

Answer 8

Indenture

Question 9

What is the coupon rate?

Answer 9

The stated interest rate on the bond

Question 10

Calculation for bond interest?

Answer 10

Coupon rate x face

Question 11

What amount is the principal payoff?

Answer 11

Full face amount

Question 12

What is the premium/discount the result of?

Answer 12

buyer and seller “adjusting” the coupon rate to the prevailing market rate of interest

Question 13

What does the face value of the bond consist of?

Answer 13

PV of future interest payments and PV of principal

Question 14

What impact does a discount have on par value?

Answer 14

Direct reduction

Question 15

What impact does a premium have on par value?

Answer 15

Addition to the par value

Question 16

How are bond issue costs recorded?

Answer 16

A deferred charge and amortized using straight-line method

Question 17

How are bond issue costs recorded under IFRS?

Answer 17

As a reduction of from the carrying value of the liability and amortized using the effective interest method

Question 18

Calculation for interest expense?

Answer 18

(Face value x stated interest rate) - Premium amortization or plus discount amortization

Question 19

What method is used for the amortization of unamortized discounts/premiums under GAAP & IFRS?

Answer 19

Effective interest method

Question 20

Calculation for amortization of the discount under the effective interest method?

Answer 20

Interest expense - Cash interest paid at the stated rate

Question 21

Calculation of interest expense under the effective interest method?

Answer 21

Carrying value at the beginning of the period x Effective interest rate

Question 22

Calculation of amortization of the premium under the effective interest method?

Answer 22

Cash interest paid at the stated rate - interest expense

Question 23

Which method has the higher carrying amount for discount premiums?

Answer 23

Effective interest method

Question 24

Which method has the lower carrying amount in bond discounts?

Answer 24

Effective interest method

Question 25

How is the sinking fund classified?

Answer 25

Non-current (restricted) asset

Question 26

How does principals mature in serial bonds?

Answer 26

Mature in installments

Question 27

What amortization methods are used for serial bonds?

Answer 27

Effective interest method and bonds outstanding method

Question 28

What type of warrant is a convertible bond?

Answer 28

Nondetachable warrant

Question 29

Is a gain or loss recognized under the book value method for convertible bonds?

Answer 29

No

Question 30

What happens at conversion in book value method for convertible bonds?

Answer 30

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

Question 31

Is a gain or loss recognized under the market value method for convertible bonds?

Answer 31

Yes

Question 32

How is the recognized gain or loss calculated for convertible bonds?

Answer 32

Market value of the stock - Book value of the bonds

Question 33

What happens at conversion in market value method for convertible bonds?

Answer 33

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.