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FAR > F 5 Bonds and Leases > Flashcards

F 5 Bonds and Leases Flashcards

1
Q

What is a serial bond?

A

Any bond that matures in installments

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2
Q

What is a term bond?

A

Any bond that matures on a single date

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3
Q

What is a debenture bond?

A

A bond not secured by any collateral

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4
Q

What is a sinking fund bond?

A

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

5 years of requirements and maturity details should be disclosed

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5
Q

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

A

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

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6
Q

How is the present value of a bond calculated?

A

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

PLUS

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

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7
Q

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

A

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

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8
Q

How are bonds reported when classified as trading securities?

A

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

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9
Q

How are bonds amortized under the interest method?

A

Both discount and premium amortization amounts increase each year

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10
Q

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

A

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

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11
Q

What is the stated rate for a bond?

A

Rate on the face of the bond

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12
Q

What is the market rate on a bond?

A

Rate that bonds are currently selling for

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13
Q

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

A

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

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14
Q

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

A

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

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15
Q

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

A

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.

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16
Q

When does interest expense start accruing on a bond?

A

When the bonds are issued

17
Q

How is an interest payment on a bond calculated?

A

Cash for payment : Stated rate x Face amount

18
Q

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

A

Interest expense : effective yield x carrying value

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

19
Q

What are convertible bonds? Which recording method is used?

A

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

20
Q

How is the retirement of bonds recorded?

A

Gain or Loss is Ordinary

Extraordinary if both unusual and infrequent

21
Q

When is a gain recognized in a debt restructuring?

A

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

22
Q

What is the gain recognized under a settlement of debt?

A

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

23
Q

For a creditor; how is a loan impairment recorded?

A

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

24
Q

How is a Capital Lease recorded?

A

Capitalize at cost: Asset & Liability Recorded at Present Value of Future Lease Payments

25
Q

What footnote disclosures are required for a Capital Lease?

A

Future minimum rental commitments

By year - for 5 years

All remaining years as a group

26
Q

What are the requirements for a Capital Lease for a lessor?

A

Same as for lessee (Title- BPO or Substance)- PLUS:

Collectability of lease payments is predictable

No uncertainties about the lessor reimbursing the lessee for costs incurred

27
Q

What are the characteristics of an Operating Lease for a lessee?

A

Risk of ownership does NOT pass

No asset or liability is recorded on the financial statements

Leasehold improvements - capitalized and depreciated over the lesser of lease life or leasehold improvement’s life.

28
Q

What are the characteristics of an Operating Lease for a LESSOR?

A

Rent revenue recorded

Leased property remains an asset and depreciated by lessor

If payments fluctuate over the term of the lease- rent revenue recognized on a straight line basis

29
Q

What are the characteristics of a Direct Financing Lease?

A

Interest Revenue (or expense for lessor) decreases with passage of time

Principal amount increases with each payment

Carrying amount of Lease decreases

30
Q

How is a sale-leaseback recorded?

A

Any profit on the sale is deferred and amortized

Exception: If PV of lease payments is 10% or less of the asset’s FMV- the gain is recognized

If PV of lease payments is greater than 10% of FMV and the lease is operating- all of the gain is recognized except the amount of the PV of the lease payments

31
Q

What are the characteristics of lease payments under an annuity due situation?

A

Payments begin at the start of the lease period

Think: Rent/Mortgage payments are Due at the first of the month

32
Q

What are the characteristics of lease payments under an ordinary annuity situation?

A

Payments begin after the end of the first year

Think: An annuity that pays you at the end of each year

33
Q

What are the characteristics of a Capital Lease for a lessee?

A

Risk of ownership passes to lessee by:
Title,
Bargain Purchase Option (BPO),
Substance - Lease is more than 75% of asset’s useful life or PV of minimum lease payments are more than 90% of fair value

FAR (5 decks)

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