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Flashcards in Bonds Debt Restructure Deck (52)

What is a serial bond?

Any bond that matures in installments


What is a term bond?

Any bond that matures on a single date


What is a debenture bond?

A bond not secured by any collateral


What is a sinking fund bond? Pg. 10-8
Bonds #41

Cash is held in a sinking fund for repayment of bond at maturity5 years of requirements and maturity details should be disclosed; considered non-current; set up for the retirement of bonds => show the entire balance


What is the formula to calculate proceeds of a bond sale?

Present Value of the principal payment at maturity
+ Present Value of Interest Payments made
: Market Value of Bond Proceeds


How is the present value of a bond calculated?

Step 1: PV of $1 @ Yield Rate (not Stated Rate)
x Bond Face Value


Step 2: PV of an Ordinary Annuity of $1 for Term @Yield
x (Stated Rate x Face)


Which costs are included in bond issuance costs? How are they recorded?

Include Engraving; Printing; Legal; Underwriter; Registration

Debited to a deferred charge account and amortized over life of Bond using S/L

Bond Proceeds - Bond Issuance Costs : Net Bond Proceeds

Time of amortization begins when issued


How are bonds reported when classified as trading securities?

Reported at FMV with unreleased gains and losses being included in earnings


How are bonds amortized under the interest method?

Both discount and premium amortization amounts increase each year


Describe the book value method when converting from bonds to stocks.

No gain or loss recognizedAPIC is the plug for the difference between the Bond's Book Value and the Par Value of the Common Stock


What is the stated rate for a bond?

Rate on the face of the bond


What is the market rate on a bond?

Rate that bonds are currently selling for


What happens when the bond's market rate is greater than the stated rate?

Bond will need to sell at a discount in order for buyers to be interested. The difference in market rate vs. the stated is made up by the buyer purchasing the bond for less than par value


What happens when a bond's market rate is less than the stated rate?

Bond will need to sell at a premium in order for buyers to be interested. The difference in market rate vs. the stated is made up by the buyer purchasing the bond for more than par value


How does accrued interest on a bond affect the purchase price?

The total cash that seller receives will be MORE than they normally would (set aside any considerations for premium or discount; they are irrelevant for this point).

Basically; the purchaser of the bonds must give the bond issuer the amount of accrued interest up front.


When does interest expense start accruing on a bond?

When the bonds are issued


How is an interest payment on a bond calculated?

Cash for payment : Stated rate x Face amount


What amount of interest is expensed on a bond interest payment?

Interest expense : effective yield x carrying value

Any difference between expense and cash payment is applied as amortization against premium/discount


What are convertible bonds? Which recording method is used, book value VS market value? Pg. 10-9

Bonds that that have an option of converting the bond into common stock and are issue at MORE THAN PAR; converting debt to equity

Book value method used if NO gain or loss

Market value method used if there is a GAIN or LOSS (Income from continuing operations)

*Only ONE security


How is the retirement of bonds recorded?

Gain or Loss is Ordinary

Extraordinary if both unusual and infrequent


When is a gain recognized in a debt restructuring?

If terms are modified; and future payments are now less than the carrying amount of the debt; then a Gain is recognized


What is the gain recognized under a settlement of debt?

Gain recognized:

Difference between cash paid and carrying amount of debt

Difference between non-cash asset given and re-valued at FMV and debt carrying amount


For a creditor; how is a loan impairment recorded?

If future cash flows discounted at loan's Effective Interest Rate are less than Carrying Value:

Effective Rate calculated using original rate; not modified rate


What is amortized cost?

Cost net of premium or discount


What is bond payable reCorded for VS bonds payable rePorted?

Recorded: Journal entry bonds payable

Reported: Net of bonds payable and discount


Effect of carrying value, interest expense, and amortization of discont for:
a) Discount
b) Premium

a) Bigger, Bigger, Bigger
b) Smaller, Smaller, Bigger


What is bond issue costs (BIC)? Pg. 10-7

When is it included in the journal entry?

Costs directly associated with the issuance of the bonds are a non-current ASSET and are amortized straight line; therefore it will increase through the debit side

When you are trying to get rid of the bond
(ie. bond retirement, convertible bond, and bonds with detachable stock purchase warrants)


What is a warrant? Pg. 10-9 (Bonds with DETACHABLE stock purchase warrants)


Its a security that can be sold or exercised by the bondholder, while still keeping the bond

*2 securities; looks like a premium but 2 securities are offered not just one, so instead premium credit do APIC - warrants

*Journal entry is like issuing a bond => find percentage from total with and without warrant and allocate to bond payable


Effective Interest Method for amortization of discount of interest of bonds Pg. 10-7

Effective Interest Method for amortization of premium of interest of bonds

Face - discount = CV
x Effective interest rate = interest expense
- cash payment (face x stated x time) ie) interest payable
= Amortization of discount

Face + premium = CV
x Effective interest rate = interest expense
- cash payment (face x stated x time) ie) interest payable
= Amortization of premium


In journal entries for bonds, what side is premium on?

Side of the bond payable or interest expense


What is bond carrying amount for bonds? Pg. 10-1

The face of the bond net of discount / premium


What is APIC? Pg. 10-9

How do you calculate the amount of stockholder's equity for bonds?

Additional paid in capital, which is part of stockholder's equity

APIC + stocks

Its part of convertible bonds (both book value method and market value method); also bonds with detachable stock purchase warrants


If company issued a bonds, when they receive cash what do you include?

What you received for bond and interest


Interest expense and interest payable different?

Yes, for interest expense use the journal entry

For interst payable use bond issued x interest x months


What do you do with bond issue expense?



What is another term to describe a bond retirement? Pg. 10-8

What are they classified as in the income statement?

Bond redemption

Part of continuing operations, unless it is determined to be both unusual and infrequent => then it is considered extraordinary


A bond sinking fund is considered treated as? Pg. 10-8

What does it include in its calculations?

Non-current asset

Revenues and expenses


At what date should a company use when reporting interest income?

Use when the bond was dated and not when it was issued


What should you think about when the problem mentions a carrying value?

Think of bonds, or accounts receivable

For bonds carrying value is net of bond payable and discount / premium => remember the effective interest table Pg. 10-7; Face - discount = CV

For AR think imputing; its the net of N/R and discount on notes receivable


For bonds with detachable stock warrants, what should you think of? Pg. 10-9

Find % of bonds with and without warrants, and multiply by face of bond => without warrant would be the carrying value


Compare effective interest method VS straight-line at a discount Pg. 10-7

Effective interest method would have smaller charges to interest expense in the early periods, and larger charges in the later periods

Straight line would be the same throughout


For bonds, what is considered as an increase in stockholder's equity? Bonds #14

APIC, C/S, and R/E


What should APIC be paired up with? Journal entry

What should bonds be paired up with? Journal entry

Together with C/S because it is the difference above par

Together with discount or premium, and BIC


What is considered interest payable in relation to bonds? Pg. 10-7

Cash paid (face x stated rate x time)

*Time = how many months that interest effects


What is the same thing as accrued interest payable? Pg. 10-6

Cash paid and interest payable (face x stated rate x time)


What included in a bond issue cost? Pg. 10-7 (4)

1) Printing and engraving of the bond certificates
2) Legal and accounting fees
3) Underwriter commissions
4) Promotion costs


When issuing a bond, how do you calculate interest expense? Bonds #4

Start with date of issuance


How do you determine cash paid in the effective interest table? Pg. 10-7

Face x stated rate x time (start when interest was paid)


What is interest payable in the effective interest table? Pg. 10-7

Cash paid (face x stated x time)


What is the significance of the C/S journal entry?

Issue at PAR => the difference is APIC


Effective interest table Pg. 10-7
a) What time do you use to calculate interest expense?
b) What time do you use to calculate cash payment?

a) When bond was issued till when its REPORTED (end date) in balance sheet
b) When interest was paid till when its REPORTED (end date) in balance sheet


What does accrued interest do in a bond problem? Bonds #49

It reduces the bonds carrrying value