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 or coupon rate or nominal 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 or market rate or yield rate*(1/2)

Question 6

(1) Effective annual Int rate

(2) Stated Rate

Answer 6

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

=Annual Int payment/Bond FV

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 (TAKE FV in case of real etsate or assets)

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

Question 43

Warrants treat as Bond issuance cost and subtract it from Bonds

Question 44

Ignorance of Amortization of premium will overstate both _______

Answer 44

CV of bond and Interest expense

Question 45

Effective rate

Answer 45

Market rate

Question 46

Detachable warrants

Answer 46

FV

Question 47

Stated = coupon interest rate

Answer 47

Bond Face Value *Stated coupon rate

Question 48

Interest expense is Bond CV *effective interest rate

Answer 48

Interest expense

Question 49

Discount

Answer 49

Interest expense is more (than payments)

Question 50

Premium

Answer 50

Interest expense is less (than payments)

Question 51

Reduce Bond Issuance cost from Discounted value of the bond

Answer 51

eg. par value = $1000000 Issued at a discount at $926399 Bond issuance cost = 20000 Net CV = $906399 (Issued price less Bond Issuance cost)

Question 52

Calculate accrued interest on par value e.g. April 1, issued 10% bonds dated Jan 1, face amount 1000000, issued for 926,399

Answer 52

Accrued interest will be from jan to March of $1000000*10%*(3/12) = $25,000 Total Cash Received = 951,399

Question 53

A loan restructured in a troubled debt restructuring is an __________

Answer 53

impaired loan. The impairment is recorded by creating a valuation allowance with a corresponding charge to bad debt expense. Step 1: Sum of future cash flows Less: PV of Principal Add: PV coupon payments Step 2: CV receivable - Sum of PVfuture cash flows = Impairment Bad debt Expense XX Allowance for Credit losses XX

Question 54

Debtor can only record a gain when assets or equity are transferred to extinguish debt

Answer 54

True, JE for Troubled Debt Restructuring (when equity is transferred to get rid of loan) ________________________________________ Equity Investments Dr. XX Allowance for credit losses (gain of Debtor) XX Note Receivable XX Interest Receivable XX OR OLD debt XX NEW debt XX Gain/Loss XX

Question 55

A liability is considered extinguished if the debtor is __________ released from being the primary obligor under the liability, either judicially or by the creditor.

Answer 55

LEGALLY A troubled debt restructuring would result in the extinguishment of debt only if the debt were forgiven by the creditor as the result of (1) A transfer of asssets or (2) the transfer of equity interest. A modification of terms is not extinguishment.

Question 56

Common stock is reported at PAR VALUE in the ______________

Answer 56

Balance sheet

Question 57

Rights were exercised in YEar 2 in example

Answer 57

APIC will increase in year 2

Question 58

Gain on extinguishment

Answer 58

Report as Income from continuing operations (Gross not net of tax)

Question 59

Accrued Interest report as ____

Answer 59

Liability in the balance sheet