Bonds Debt Restructure Flashcards Preview

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Flashcards in Bonds Debt Restructure Deck (24):

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?

Cash is held in a sinking fund for repayment of bond at maturity

5 years of requirements and maturity details should be disclosed


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 recognized

APIC 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?

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


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 are the rules with regard to a troubled debt restructuring?

In a troubled debt restructure involving a modification of terms, the accounting depends on the relationship between the carrying amount of the debt before the modification (principal + unpaid interest (accrued interest) and the total future payments (new reduced principal and interest or other pymts to be paid AFTER modification of terms)

Total future payments > Carrying amount

1. Excess is recognized as future interest expense using a newly computed effective interest rate

2. No GAIN is recognized

Carrying amount > Total future payments

1. Excess is recognized as a GAIN

2. No future interest expense is recognized