Deck #12 (F5)

Question 1

how do you record long term liabilities and what are some examples?

Answer 1

at present value

• LT notes
• bonds
• LT leases
• LT contingent liabilites
• deferred comp agreements
• pensions

Question 2

how do you distinguish liabilities from equity?

Answer 2

liabilities have a maturity date

Question 3

bonds:

what is a stated rate?

Answer 3

also called coupon rate or nominal rate.

the interest to be paid to the investors in cash. specified in the contract

Question 4

bonds:

what is a market rate?

Answer 4

rate of interest actually earned by the bondholder and is the rate of return for comparable contracts

Question 5

bonds:

what is a discount?

Answer 5

if the market rate is higher than the stated (or nominal rate)

Question 6

bonds:

what is a premium?

Answer 6

if the market rate is lower than the stated (or nominal rate) rate

Question 7

what is a convertible bond?

Answer 7

convertible into common stock of the debtor. typically have nondetachable or detachable warrants

nondetachable warrant - the CB itself must be converted itself into stock

detachable warrant - bond is not surrendered upon conversion, only the warrants plus cash representing the exercise price of the warrants. warrants can be bought and sold separate from bonds.

Question 8

what is a debenture?

Answer 8

an unsecured bond

Question 9

what is a term bond

Answer 9

term bonds have single fixed maturity dates

Question 10

what is a serial bond

Answer 10

serial bonds are renumbered bonds that the issuer may call and redeem a portion by the serial number

Question 11

when is a bond “issued at par value”

Answer 11

when the stated (nominal) rate is equal to the market (effective) rate on date of issuance

Question 12

straight line vs effective interest method of amortization?

Answer 12

SL - not GAAP, unless its essentially the same result as effective int.

SL - IFRS does not allow

Just use effective interest method

Question 13

how is interest expense calculated?

Answer 13

premium (discount) and issue cost / number of periods bond is outstanding = premium amortization

interest expense = (face value x interest rate) - premium amortization (or plus discount and bond issuance cost amort.)

Question 14

Company A issues a 10% bond, 1,000,000 due in five years. The current market rate is 12%. what type of bond amortization model is used?

Answer 14

bond DISCOUNT

Question 15

JE: recording bonds on issuance date for BORROWER and INVESTOR under straight line (discount)

Answer 15

BORROWER
DR: Cash
DR: Discount on bond payable
CR: Bond Payable

INVESTOR
DR: Investment in bonds
CR: Cash

Note: premium entry would be the same except for changing the wording

Question 16

JE: recording first interest payment for BORROWER and INVESTOR under straight line (discount)

Answer 16

BORROWER
DR: Bond interest expense
CR: Discount on bond payable
CR: Cash

INVESTOR
DR: Cash
DR: Investment in bonds
CR: Bonds interest revenue

Note: premium entry would be the same except for changing the wording

Question 17

JE: What are the 2 entries to record bond amortization for the Borrower under effective interest method

Answer 17

record bonds at issuance
DR: Cash
CR: Premium/discount on bonds payable
CR: Bond payable

first interest payment
DR: Bond interest expense
DR: Premium on bonds payable
CR: Cash

Question 18

JE: What are the 2 entries to record bond amortization for the Investor under effective interest method

Answer 18

record bonds at issuance
DR: Investment in bonds
CR: Cash

first interest payment
DR: Cash
DR: Investment in Bonds
CR: bond interest revenue

Question 19

what happens if bonds are issued between interest dates?

Answer 19

you must accrue interest. this is done by multiplying the face amount by the interest rate (for the number of months accrued/12)

Question 20

what is trouble debt restucturing

Answer 20

when creditor allows the debtor certain concessions to improve the likelihood of collection

Question 21

when is the debt considered extinguished?

Answer 21

once the transfer of assets or transfer of equity interest has taken place (this does not happen under the modifications of terms type)

Question 22

what are the 4 types of troubled debt restructuring?

Answer 22

1. transfer of assets
2. transfer of equity
3. modification of terms
4. there could be a combination of types

Question 23

how is impairment recorded by the creditor?

Answer 23

DR: bad debt exp
CR: Allowance for credit losses