Flashcards in LONG-TERM DEBT Deck (95):
What method is required for premium/discount amortization?
Effective interest method.
A financial debt instrument that typically calls for the payment of periodic interest (although a zero-coupon bond pays no interest), with the principal being due at some time in the future.
When are bonds sold at a discount?
When stated rate
When are bonds sold at a premium?
When stated rate > market rate.
Define "bond date."
The first possible issuance date.
Define "secured bonds."
Bonds that have a claim to specific assets.
Define "serial bonds."
Bonds that mature at regular or staggered intervals.
Describe three general aspects about the valuation of all long-term liabilities.
1. Initially recorded at the present value of future cash flows; 2. Interest and amortization are recognized at the market interest rate the date the liability was established; 3. Interest expense equals the liability balance at the beginning of the period times the market rate of interest the date the liability was recorded.
Define "maturity date."
The date the maturity value is paid, the end of the bond term.
Define "issuance date."
The date the bonds are actually issued.
What is the length of a bond term when bonds are issued between interest dates?
Period of time from issuance date to maturity date.
How are bond issue costs accounted for?
Capitalized as a noncurrent deferred charge (asset account) and amortized to expense over the term of the bonds using the straight-line method.
Define "bond issue costs".
The costs of printing, registering, and marketing the bonds.
How many months of interest are collected at issuance when bonds are issued between interest dates?
Number of months between the most recent interest payment date and the date of issuance.
Define "bond proceeds."
The sum of the bond price and any accrued interest.
Define "stated rate."
Rate listed on the bond and used to calculate accrued interest.
What is the international treatment of debt issue costs?
Reduction in the proceeds from the debt.
Is the fair value option for financial liabilities required and to what securities is it applied?
It is an option (not required) and can be applied to any and all financial liabilities.
How is interest expenses on the current line of an effective interest bond amortization schedule computed?
Multiply one-half the yield rate at date of issuance by the book value of the bond issue on the line above the current line.
What is the income statement effect of the fair value option applied to financial liabilities?
Recognize gain or loss for the change in the fair value adjustment of the liability during the period.
What is the balance sheet effect of the fair value option applied to financial liabilities?
Report liability at fair value.
How is total interest expense for a bond issue using an effective interest bond amortization schedule (assume a premium) computed?
Sum of the cash interest column less sum of amortization of premium column.
What is the international applicability of the fair value option?
Limited to liabilities that are part of a group with financial assets managed together.
How should the exercise of detachable warrants be accounted for?
Debit cash for exercise price, debit detachable warrants, credit common stock and additional paid in capital (APIC).
How should the issuance of bonds with detachable warrants be recorded when the market value of both are known?
Proceeds are allocated to eachissue based on the respective fair market values of the securities.
What is the purpose of detachable stock warrants?
To increase marketability of bond issue.
How should bonds with detachable warrants be accounted for after issuance?
Unaffected by warrants; amortize premium or discount.
How should the issuance of bonds with detachable warrants be recorded when only one market value is known?
Proceeds equal to the fair market value are allocated to that security, and the incremental proceeds are allocated to the remaining security.
What is the market value method of recorded converted debt?
The more reliable of market value of the stock or bonds is allocated to the capital stock account and contributed capital in excess of par account. A gain or loss is recorded equal to the difference between the total market value recorded and the remaining book value of the bonds.
What method of recording converted debt does not recognize a gain or loss?
Book value method.
What is the book value method of recording converted debt?
Remaining book value of the bonds is transferred to the capital stock account and contributed capital in excess of par account. No gain or loss is recorded.
When a convertible bond is issued, how are the proceeds treated?
The same as a nonconvertible bond. Nothing allocated to the conversion feature.
What is the accounting treatment for convertible bonds with a beneficial conversion feature?
The excess of fair value of the stock to be issued upon conversion (measured at the date of issuance) over the face value of the bonds, is allocated to owners' equity.
Bonds are unaffected by conversion feature until what point in time?
Until conversion takes place.
What is the accounting treatment by the issuer for additional consideration paid to induce conversion of convertible bonds?
Recognize expense for the fair value of the additional consideration.
What amount is allocated to owners' equity on issuance of convertible bonds that can be settled in cash?
Issuance price less the present value of the bonds using the prevailing rate on similar bonds.
List the three key elements of liabilities.
1. Probable future sacrifice of economic benefits; 2. Obligations to transfer assets or provide services in the future; 3. Result of past transactions or events.
Which liability requires more future cash payments: a current liability reported at $2 million or a noncurrent liability reported at $2 million?
Noncurrent liability requires more future cash payments.
How should a short-term note payable refinanced every six months on a continuous basis be classified?
The classification of this note is Current.
What do liabilities represent?
Represent outsider claims to a firm's assets or are enforceable claims for services to be rendered by the firm.
How are current liabilities valued and recorded?
Due to materiality, normally recorded at face value.
List some examples of specific attributes in a covenant.
Minimum Current Ratio, Maximum Debt to Equity Ratio.
What is the classification of liability subject to a subjective acceleration clause?
Current if it is possible the debt will be called; noncurrent if a remote chance exists of calling the debts.
What is the classification of a liability callable on demand if debt covenant is violated and it is probable that the debtor will cure violation?
Give an example of a response by a creditor if the debt covenant is violated by the debtor.
Require the debtor to pay the debt or refinance the debt.
Define debt covenant compliance.
Steps taken by debtor to meet the restriction and reporting such compliance.
Define covenant-lite loan.
Loan with less stringent restrictions.
Define debt covenant.
Restriction on debtor and possible responses by creditor.
What is the classification of liabilities that are due on demand?
List the steps to retire debt on the books.
1. Record interest, amortization of discount/premium, issue costs to date of retirement; 2. Remove debt and related accounts; 3. Record gain or loss.
How are gains/losses from extinguishment of debt reported on the income statement?
Recognized as components of income from continuing operations.
List the conditions that must exist for debt to be extinguished.
1. Debtor pays creditor and is relieved of obligation; 2. Debtor is legally released from being primary obligor.
What accounts are used to record cash received from a customer before the revenue is earned?
Unearned revenue, revenue collected in advance.
How are deferred revenues expected to be earned more than one year from the balance sheet date classified?
How is the change in the deferred revenue account calculated for a period?
Cash received during the period less revenue earned for the period.
What is the distinction between notes payable and accounts payable?
1. Time period is usually extended; 2. Notes have an interest element.
List the two different methods of amortizing a discount or premium on a note.
1. Effective interest method; 2. Straight-line method.
What is the net note balance for a note issued at a discount?
Face value less unamortized discount.
What is the amount of interest recognized for a period on an installment note (one requiring equal periodic payments that include both principal and interest)?
Product of effective rate at date of issuing the note and the principal balance at the beginning of the period.
When is the straight-line method not allowed for notes payable accounting?
Installment notes, and when the yield and stated rates are materially different.
Define "interest-bearing note payable."
A note in which the interest element is explicitly stated.
List the two different methods of recording a note for which a discount or premium is recorded.
1. Gross method; 2. Net method.
What is the principal amount of a noninterest-bearing note?
Present value of the face amount discounted at the yield rate on the note.
What is the amount of interest recognized for a period on a note calling for a face amount due at maturity, issued with an effective interest rate not equal to the stated rate?
Product of effective rate at date of issuing the note and the principal balance at the beginning of the period.
What is the amount of the periodic payment for an installment note issued at discount?
Face value divided by the annuity factor for the term of the note and the stated rate on the note.
What causes a discount on a note?
When yield rate is greater than stated rate.
What causes a premium on a note?
When yield rate is ess than stated rate.
Is a noninterest-bearing note issued at a premium or discount?
What is the reported amount of a note calling for a face amount due at maturity, issued with an effective interest rate not equal to the stated rate?
Present value of remaining cash flows discounted at the effective rate.
Define "discount on note" for a note exchanged for cash and other privileges.
The amount of noninterest revenue recognized over the term of the note.
What is the total interest expense recognized on a noninterest-bearing note?
Total payments less amount borrowed.
What is the amount borrowed on an installment note issued at discount?
Product of the periodic payment and the annuity factor for the term of the note and the yield rate on the note.
List the criteria for reclassifying current liabilities to long term.
1. The intent to refinance the short-term obligation must be proven; and 2. The firm must demonstrate the ability to refinance the obligation.
List the three ways to meet the "ability to refinance" requirement.
1. Actually refinance before issuance of the financial statements; 2. Enter into a noncancelable refinancing agreement supported by a viable lender; 3. Issue equity securities replacing the debt.
How does an entity show intent to refinance short-term obligations?
Must be proven, possibly in the form of board of directors' meeting minutes.
What payroll taxes are paid only by the employer?
State and federal unemployment taxes paid only by employer.
Define "sales taxes payable".
Account recognized for sales tax collected from customers.
How are nonmonetary liabilities paid?
Payable in services or nonmonetary assets.
What payroll taxes are paid in equal amounts by the employer and the employee?
Federal Insurance Contributions Act (FICA) tax, Medicare.
How is the total employer expense for payroll computed?
Gross pay + employer payroll taxes + employer portion of employee fringe benefits.
What is the classification of an account credited when cash is received from customers for an extended warranty?
Current liability, noncurrent liability, depending on expected period of warranty claim work.
What account should be credited when gift cards are considered forfeited and the seller has no obligation to the state?
Miscellaneous revenue or sales.
Are gift cards liabilities, definite liabilities, or contingent liabilities?
They are definite liabilities.
What increases in pretax earnings when a gift card is used by a customer to purchase an item?
Gross margin for the item sold.
What amount of revenue is recognized for a period for an extended warranty when total warranty costs are not estimable?
The total amount received for the extended warranty multiplied by the fraction: 1/(term of extended warranty contract in years).
What amount of revenue is recognized for a period for an extended warranty when total warranty costs are estimable?
The total amount received for the extended warranty multiplied by the fraction: warranty costs incurred for the period divided by the total estimated warranty costs to be incurred.
What is the classification of an account that is credited when cash is received from gift cards sold to customers?
Current liability, noncurrent liability, depending on expected period of sale.
What is the amount of interest to be recognized after a troubled debt restructure modifies the terms of the original debt such that the sum of restructured cash flows is greater than the book value of the original debt?
Difference between the sum of restructured cash flows and the book value of the original debt.
What is the nature of restructured cash flows for a troubled debt restructure that modifies the terms of the original debt such that the sum of restructured cash flows is less than the book value of the original debt?
They are all treated as principal payments.
List the two categories of modification of terms debt restructures for international accounting standards.
Significant modification and not significant modification.
What is the international accounting standard treatment of settlement troubled debt restructures?
Same as U.S. accounting but is considered an extinguishment.
What is the amount of interest to be recognized after a troubled debt restructure that modifies the terms of the original debt such that the sum of restructured cash flows is less than the book value of the original debt?
No interest is recognized; all payments are considered principal payments.
What requirements must exist for a debt restructuring to be troubled?
Creditor makes a concession, and debtor must be in financial difficulty.
Describe the post-restructure interest rate for a troubled debt restructure that modifies the terms of the original debt such that the sum of restructured cash flows is greater than the book value of the original debt.
Rate that equates the book value of the original debt with the present value of restructured cash flows.