Bonds Debt Restructure Flashcards
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 the market rate on a bond?
Rate that bonds are currently selling for
When does interest expense start accruing on a bond?
When the bonds are issued
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 are convertible bonds? Which recording method is used?
Bonds that can be converted to stock
Book value method used if no gain or loss
Market value method used if there is a gain or loss
What is a debenture bond?
A bond not secured by any collateral
How is the retirement of bonds recorded?
Gain or Loss is Ordinary
Extraordinary if both unusual and infrequent
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
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
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.
What is a serial bond?
Any bond that matures in installments
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
Which costs are included in bond issuance costs? How are they recorded?
Include Engraving; Printing; Legal; Underwriter; Registration
New Way: Subtracted from Carrying Amount of the Bond
Old Way: Amortized
Treatment: Retrospective Treatment to all prior periods presented
Effect: Increases Effective Interest Rate
How are bonds amortized under the interest method?
Both discount and premium amortization amounts increase each year
What is the stated rate for a bond?
Rate on the face of the bond