Unit 11 - Noncurrent Liabilities Flashcards
Types of Bond Liabilities
Term bonds mature on a single date
Example - Registered bonds and collateral trust bonds
9.75% registered debentures, callable in Year 15, due in Year 20
9.50% collateral trust bonds, convertible into common stock beginning in Year 13, due in Year 23
Types of Bond Liabilities
Bonds payable issued with scheduled maturities at various dates are called
Serial Bonds = Yes
Term Bonds = No
Serial bonds are bond issues that mature in installments at various dates.
Term bonds mature on a single date.
Bonds Payable - Initial Measurement
How do you calculate interest payable?
= Face amt. of bonds X nominal (stated) interest rate X portion of interest period included in the accounting period
Note: They yield rate and sale between interest periods for an amount including accrued interest DO NOT affect interest payable.
Bonds Payable - Initial Measurement
What should the issue price be for each bond?
The issue price of a bond equals the sum of the present values of the future cash flows (Principal + Interest).
[ Face amount X PV of 1 for 10 periods at 9% (YIELD)] +
[ Face amount X Stated rate X PV of an ordinary annuity for 10 periods at 9% (YIELD) ]
Bonds Payable - Subsequent Measurement
How is the carrying amount of a bond payable affected by amortization for
Discount and Premium
Discount - Increase
Premium - Decrease
The carrying amount of a bond payable is equal to its maturity (face) amount plus any unamortized premium or minus any unamortized discount.
Amortization results in a reduction of the discount or premium.
Consequently, the carrying amount of a bond is INCREASED when DISCOUNT is amortized and DECREASED when PREMIUM is amortized.
Debt Issue Costs consist of ….
Debt issue costs include
(1) printing costs,
(2) underwriters’ commissions,
(3) attorney’s fees, and
(4) promotion costs (including preparation of a prospectus).
Debt issue costs are presented as a direct deduction from the related debt liability.
Securities with Characteristics of Liabilities and Equity
On December 30, Year 4, Fort, Inc., issued 1,000 of its 8%, 10-year, $1,000 face value bonds with detachable stock warrants at par. Each bond carried a detachable warrant for one share of Fort’s common stock at a specified option price of $25.75 per share. Immediately after issuance, the market value of the bonds without the warrants was $1,080,000, and the market value of the warrants was $120,000. In its December 31, Year 4, balance sheet, what amount should Fort report as bonds payable?
The issue price of the bonds is allocated between the bonds and the detachable stock warrants based on their relative fair values. The market price of bonds without the warrants is $1,080,000, which is 90% [$1,080,000 ÷ ($1,080,000 + $120,000)] of the total fair value. Consequently, 90% of the issue price should be allocated to the bonds, and they should be reported at $900,000 ($1,000,000 × 90%) in the balance sheet.
Extinguishment of Debt
How do you calculate?
The amount of gain or loss on the redemption of bonds is equal to the difference between the proceeds paid and the carrying amount of the debt.
The carrying amount of the bonds is equal to the face amount, plus unamortized bond premium, minus unamortized bond issue costs.
eg.
Thus, the carrying amount of the bonds is $4,980,000 ($5,000,000 + $30,000 – $50,000). The $80,000 gain is the difference between the carrying amount ($4,980,000) and the amount paid $4,900,000 ($5,000,000 × 98%).
Troubled debt restructurings
When a troubled debt restructuring includes a modification of terms that results in future undiscounted cash flows less than the carrying amount of the debt, the debtor recognizes a gain equal to the difference.
No gain is recognized if the future undiscounted cash flows are greater than the carrying amount of the debt.
Asset Retirement Obligations (ARO)
The fair value of the ARO liability is recognized when incurred. If a reasonable estimate of the fair value cannot be made at that time, the ARO will be recognized when such an estimate can be made.
An expected present value technique ordinarily should be used to estimate the fair value.
A credit-adjusted risk-free rate is the appropriate discount rate.
