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ACC 213 > Chapter 14 (Financing Liabilites) > Flashcards

Chapter 14 (Financing Liabilites) Flashcards

1
Q

What are the labels of all the columns included in an effective interest amortization table (discount/premium)?

A

From left to right:

  1. Date
  2. Stated Interest (Cash Payment)
  3. Market Rate (Interest Expense)
  4. Discount or Premium Amortization
  5. Carrying Value
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2
Q

How to Calculate Cash Interest Payment?

A

Face Value x Stated Rate x Time

I=PRT

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3
Q

Adjusting Entry for Accrued Interest

A

Dr Interest Expense

Cr Interest Payable

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4
Q

What does every adjusting entry include?

A

One income statement account and one balance sheet account

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5
Q

Accounts Payable

A

No interest, regular notes to vendors/supplies, typically short term

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6
Q

Notes Payable

A

Interest, underlying legal document (promissory note), typically long term

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7
Q

Current Liabilities

A

Debt expected to be extinguished in the operating cycle or year, whichever is longer; can be extinguished with current assets or by creating liabilities

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8
Q

Noncurrent Note Payable

A
  1. Term Loan: payment of interest periodically, principal is paid at a specific due date (maturity)
  2. Installment Loan: each payment consists of interest plus the principal (car, education, mortgage)
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9
Q

Things to Identify When Reading a Question

A
  1. Stated Interest Rate
  2. Market Rate of Interest
  3. Issuance Debt
  4. Interest Payment Date
  5. Year/End Date
  6. Date Financial Statements are Issued (Quarterly, Annually)
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10
Q

The ______ is initially reported as a debit. It is a ________ on the balance sheet. It is ________ each interest period. ________ increases the cost of borrowing.

A

Discount Account

Contra Liability

ALWAYS

Discounting

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11
Q

Entry for Issuance of Bonds (Par Value)

A

Dr Cash

Cr Bonds Payable

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12
Q

Entry for Issuance of Bonds (Discount)

A

Dr Cash
Dr Discount
Cr Bonds Payable

  • **increases the cost of borrowing
  • **recognized as interest expense when interest is paid or accrued
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13
Q

Entry for Issuance of Bonds (Premium)

A

Dr Cash
Cr Bonds Payable
Cr Premium

  • **reduces the cost of borrowing
  • **recognized as interest expense as a reduction when interest is paid or accrued
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14
Q

Stated Rate = Market Rate

A

Par

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15
Q

Stated Rate < Market Rate

A

Discount

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16
Q

Stated Rate > Market Rate

A

Premium

17
Q

Effective Interest Expense Calculation

A

Market Rate x Carrying Value of the Bond at the Beginning of the Period

18
Q

Discount/Premium Amortization Calculation

A

Effective Interest Expense - Cash Interest Paid

19
Q

Zero Coupon Bonds

A

Issuer does not have to pay periodic interest expense

Will record interest expense, but not to Cash; Stated rate is zero, no cash interest

Difference between issue price and face value represents interest expense over the life of the bond

Typically issues at significant discounts, market rate is always higher than zero coupon bond

Will be recording a discount at issuance

20
Q

When a bond is issued between dates, you MUST

A

Pay interest accrued up to the point of issuance (GAAP)

21
Q

Early Retirement of Bonds

A

Always have to calculate gain/loss on retirement (extinguishment)

**Gain occurs if the cash paid is less than the CV of bonds at retirement

***Loss occurs if the cash paid is greater than the CV of bonds at retirement

22
Q

Convertible Bonds

A

Option of surrendering bonds and converting to shares

***How many bonds are issued, conversion ratio

23
Q

Warrant

A

Long-term options to acquire a stated number of shares at a specific price

***HAVE to pay warrant price

24
Q

Detachable Warrants

A

Removed by holder and sold separate on the secondary market

25
Q

Non Detachable Warrants

A

Can not be separated

***No allocation between debt and equity

26
Q

Proportional Method

A

Allocation of Cost

Cr Bonds Payable
Cr APIC

27
Q

Incremental Method

A

Allocation of proceeds to instrument with fair value that is determinable, allocate residual value to the other instrument

28
Q

Zero Coupon Bond Entries

A

Issuance:
Dr Cash
Dr Discount on Bonds Payable
Cr Bonds Payable

Interest:
Dr Interest Expense
Cr Discount on Bonds Payable

Maturity:
Dr Bonds Payable
Cr Cash

  • **Interest Payments are never a credit to cash
  • **ALWAYS a discount
29
Q

Short Term Debt Expected to be Refinanced

A
  1. Demonstrate ability to reclassify liability

2. Satisfy or pay off Current Liabilities with issued debt

30
Q

Why would corporations refinance short term debt?

A

To improve liquidity ratios (current ratio, quick ratio, etc.)

31
Q

Fair Value Option

A

OPTION— NOT required

Restate financial assets and financial liabilities to fair market value using new account which is fair value adjustment account

ACC 213 (7 decks)

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