LT Debt and Bonds

Question 1

What is the calculation of the bond proceeds for bonds issued between interest dates?

Answer 1

At issuance, the investor pays in cash the amount of accrued interest, which he/she will receive back at the next interest payment date, when the investor receives the full 6-month or 1-year’s worth of interest payments.

E.g. a bond issue dated Jan 1 is issued on Feb 28.
2 months of interest have already accrued. At issuance, the investor pays for the bond + 2 months’ worth of accrued interest. On Jun 30, the investor then receives the full 6 months’ worth of interest.

Question 2

What is the treatment for debt issue costs?

Answer 2

Debt issue costs include legal fees, printing costs, and promotion costs related to the issuance of a debt instrument. Incremental costs if issuing debt. Increases effective interest rate.

• a direct deduction from the debt’s carrying amount and reduce bond proceeds.
• similar treatment as stock issue costs.
• not capitalized but amortized over the life of the bond,; very similar treatment to BP discounts.

Question 3

A firm makes an irrevocable choice to elect the FVO on the date of issuance of bond payables. How are unrealized gains and losses treated?

Answer 3

Portion of unrealized G/L attributable to a general change in interest rates: FV to NI

Portion of unrealized G/L attributable to credit risk (i.e., decline in creditworthiness): FV to OCI

FASB now requires that the credit risk portion of G/L on a financial liability be recorded in other comprehensive income. This approach reduces the volatility in NI for preparers.

When bonds mature or are extinguished, any accumulated OCI gains and losses due to changes in interest rates are reclassified to NI.

Question 4

What are the 2 conditions for reclassifying short term debts as noncurrent?

Answer 4

Must have intent and ability to refinance as short term.

Ability must be demonstrated before the f/s issuance date. (In contrast, IFRS requires that ability must be demonstrated before the b/s date.)

Question 5

Define troubled debt restructuring

Answer 5

A TDR occurs when the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it wouldn’t otherwise consider.

2 options:
A. Settlement at less than the debt’s CV through transfer of cash or equity.
B. Modification of debt terms.