Bonds

Question 1

Carrying Amount

Answer 1

Present value of face amount + Present value of all future interest payments at date of issuance

Question 2

Cash paid

Answer 2

Face amount * Stated interest rate *1/2

Question 3

Amortization

Answer 3

Cash paid - Interest expense

Question 4

Unamortized premium

Answer 4

Carrying amount - Face amount

Question 5

Interest Expense

Answer 5

Carrying amount at the beginning of the period * Effective Int rate *(1/2)

Question 6

Effective annual Int rate

Answer 6

(Int expense/carrying amount at the beginning of the period)*2

Question 7

Cash Interest Payment

Answer 7

Bond Face Value * Stated Coupon Rate

Question 8

Interest Expense

Answer 8

Bond Carrying Value * Effective Interest Rate

Question 9

Inverse relationship between market interest rates and bond prices.

Answer 9

True

Question 10

Sinking Bonds can be repurchased in limited quantities periodically at specified prices.

Answer 10

True

Question 11

Debentures

Answer 11

Backed by borrower’s general credit

Question 12

Collateralized

Answer 12

Backed by specific assets

Question 13

Cash Payment

Answer 13

is equal to Annuity (use annuity rate)
Cash or annuity payment is calculated based on
E.g. 10% Bond of 100000 paid semi-annually
Cash payment = 1000006/120.10=USD 5000

Question 14

Face Value - Discount = CV
1000000-61000=939,000

Answer 14

Interest on CV = CV yield rate
e.g. 9390000.10=93,900

Question 15

In a troubled debt restructuring, when the FV option is not elected, if a noncash asset is exchanged to settle the debt:

Answer 15

The noncash asset is revalued to FV, with a gain or loss recognized on the asset.

Question 16

Bond premium amortization = Cash Interest Payment - Interest Income

Cash Interest Payment = Bond face value * Stated Coupon Rate
Less:
Interest Income = Bond Carrying Value * Effective Interest Rate

Question 17

The primary reason for a company to agree to a debt covenant limiting the percentage of its long-term debt is

Answer 17

to reduce the interest rate on the bonds being sold.

Question 18

If the covenant includes a subjective acceleration clause and there is only a remote chance that debt will be called, then the liability is classified as noncurrent.

Answer 18

True

Question 19

Refinancing current debt on a long term basis and appropriating retained earnings helps a firm to maintain compliance with a debt covenant that includes a minimum current ratio and a minimum retained earnings balance.

Answer 19

True

Question 20

If a long-term debt becomes callable due to the violation of a loan covenant, the debt must be reclassified as

Answer 20

CURRENT

Question 21

The note payable should be presented in the Statement of Financial position _________________________

Answer 21

at the face amount minus a discount calculated at the imputed interest rate.

Question 22

Notes payable are written promises to pay an amount of money on a specified future date. Goods or services issued in exchange for a note are recorded at _________

Answer 22

• the FV of the note
• the FV of the goods or services
• the PV of the note using a fair interest rate

Question 23

Interest payment (stated rate)

Answer 23

PV at Ordinary annuity rate

Question 24

Bond issue or PV bond maturity

Answer 24

No. of bonds * PV of $1 for 10 periods

Question 25

Stated Rate

Answer 25

Annual Interest Payment/Bond Face Value

Question 26

________________ operations on the income statement is used when an entity disposes of a portion of its business, not a single holding or liability.

Answer 26

Discontinued

Question 27

Retiring bond will count as income from ______________________

Answer 27

Continuing operations

Question 28

The determination of whether a restructuring is troubled is based on the book value at the time of the restructuring, not the fair value of the debt.

Answer 28

True

Question 29

IF the equity (Common stock, preferred stock, options, etc.) create an unconditional obligation for the issuer to transfer assets - classify as __________________

Answer 29

Liability

Question 30

Discount - Interest expense is more than cash payments

Answer 30

True

Question 31

Equity method would be used if ownership is between _________

Answer 31

20% to 50% (significant influence)

Question 32

Adjusted cost method (cost minus impairment losses) will be used if ___________

Answer 32

less than 20% ownership of investee’s voting stock (No significant influence)

Question 33

A ST marketable debt security was purchased on Sep1, Yr 1 between int dates. The next int payment date was Feb 1, Yr 2. On the balance sheet at Dec 31, Yr 1, the debt security should be carried at _______

Answer 33

Fair Value. A short-term marketable debt security would be carried in a trading portfolio. Securities in trading portfolios are carried at FAIR VALUE.

Question 34

Equity method - Dividends will be recorded as a reduction of the investment account

Question 35

Interest expense will increase when Bond is issued at a discount

Answer 35

True (Int expense will be higher than Cash Interest Payment)

Question 36

Bond Issue Costs

Answer 36

Printing and engraving bond certificates, legal and accounting fees, underwriter commissions, promotion costs (printing the prospectus), registration

Question 37

Gains or Losses from the early extinguishment of debt should be __________

Answer 37

recognized in income before taxes in the period of extinguishment in the income statement at time of extinguishment (retirement)

Question 38

Bond sinking funds are non current assets. Purpose is to accumulate funds for the retirement of bonds. Interest and dividends added to fund balance and reported as income.

Answer 38

True

Question 39

Gain on restructuring of debt =

Answer 39

CV of note - FMV of land

Question 40

SL method (int expense is same) 2

Answer 40

=Discount or Premium/No. of periods

Question 41

Zero coupon bonds must use ___________

Answer 41

Effective Interest Method

Question 42

When the NONINTEREST bearing note is issued, the interest is recorded as a contra-account called DISCOUNT ON NR.

Answer 42

It is calculated as the difference between the FV of the note and its PV based on the mkt rate of int.

JE at the time of issuing the note

Notes receivable (Face amount) XX
Discount on Notes Recvable XX
Sales Revenue

Year end Adjusting entry

DIscount on Notes receivable XX
Interest Revenue XX