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FAR > Present Value 13b - Bonds > Flashcards

Present Value 13b - Bonds Flashcards

1
Q

What are other terms for the Market Rate when dealing with Bonds?

A
  1. Real
  2. Yield
  3. YTM
  4. Effective
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1
Q

What are other terms for the Contract Rate when dealing with Bonds?

A
  1. Coupon
  2. Stated
  3. Bond
  4. Face
  5. Nominal
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1
Q

What date is the Market Rate figured on?

A

The Bond Issue Date

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1
Q

What is a Term Bond?

A

A bond in which the entire principle matures at the very end

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1
Q

What is a Serial Bond?

A

A bond where the principle matures throughout the life of the bond

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1
Q

What is a Debenture Bond?

A

An unsecured Bond that is not backed by collateral

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2
Q

What is conversion of debt?

A

The conversion of debt into equity

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3
Q

What are Convertible Debt Securities?

A

Debt Securities that give the buyer the option to convert the investment to SHE

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4
Q

What is a Detachable Warrant?

A

Debt issued stock options

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5
Q

What is Extinguishment of Debt?

A

When a debtor pays a creditor and is relieved of all obligations regarding that debt

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6
Q

What is the Fair Value Option regarding bond issuance?

A

The issuer my elect the FVO instead of recording the bond at it’s issue price

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7
Q

What are two ways to amortize the discount/premiums on Bonds?

A
  1. Straight Line Method

2. Effective Interest Method

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8
Q

When may the Straight Line Method be used?

A

When the interest is immaterial

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9
Q

What is the JE for the Issuer for Bonds issued at a discount?

A

Cash DR
Discount DR
Bonds Payabe CR

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10
Q

What is the JE for the Buyer of Bonds issued at a discount?

A

Bond Investment DR

Cash CR

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11
Q

What type of account is a Discount?

A

Contra Liability

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12
Q

What type of account is a Premium?

A

Adjunct

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13
Q

What is the JE for Interest for the Issuer for Bonds issued at a discount

A

Interest Exp DR
Discount CR
Cash CR

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14
Q

What is the JE for Interest for the Buyer for Bonds issued at a discount?

A

Cash DR
Bond Invest DR
Interest Rev CR

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15
Q

Is the Face Value or Carrying Value shown on the Balance Sheet?

A

Carrying Value

CV = Face Value +- Premium/Discounts

16
Q

Where are Bond Issue Costs shown on the Balance Sheet?

A

Other Assets

17
Q

What are included in Bond Issue Costs?

A

Any cost to get the Bonds ready for issuance

18
Q

How are Bond Issue Costs treated?

A

As a deferred cost and amortized on a Straight Line basis over the life of the bond

Issue Cost/Number of Periods from ISSUE DATE to Maturity Date

19
Q

What is amortization on Bonds for an issuer?

A

Basically, a deferral on the gain of a premium or a deferral on the loss of a discounted bond

20
Q

The term “Discount” can also be used as what?

A

To take the Present Value

21
Q

How does an issuer calculate Net Proceeds from a bonds issuance?

A

Bond Face Value +- Premium/Discount - Bond Issue Cost

22
Q

What are two ways to convert Convertible Bonds?

A
  1. Book Value - No Gain/Loss

2. Market Value - Possible Gain/Loss

23
Q

What is a “Sweetener?”

A

When companies who issue convertible bonds sweeten the deal for buyers to convert to equity

24
Q

What is a bond sinking fund?

A

A Savings account where the company accumulates funds in order to pay off the bond principle

25
Q

Where is the Bond Sinking Fund shown on the BS?

A

Long Term Investment

26
Q

Where are the Bond Sinking Fund requirements listed?

A

On the Bond Indenture (which is the contract between the bond issuer and buyer)

27
Q

How many years disclosure does the Bond Sinking Fund require?

A

5

28
Q

How is the Excel PV Formula broken down?

A 
Rate = Market Rate Per Period
NPER = Number of Periods
PMT = Payment/Annuities (should be negative)
FV = Principle (should be negative)
TYPE = 0
29
Q

When can the FVO be elected?

A

The date the Bond was bought

30
Q

Do you use the discount or premium when electing FVO?

A

No

31
Q

Is Effective Interest Method required with FVO?

A

No

32
Q

What must be disclosed if FVO is elected?

A

Principle & Fair Value

33
Q

Where do the Gains & Losses go to if the FVO is elected?

A

Income Statement

34
Q

How can Bonds be classified?

A
  1. Trading - FMV on BS - Unreal -> IS Cont OPS
  2. AFS - FMV on BS - Unreal G/L -> OCI
  3. HTM - Carrying Value or Amort Cost - No Unreal G/L
35
Q

If the FVO is elected for AFS or HTM, how are they treated?

A

Just like Trading Securities

36
Q

What is the major difference between IFRS and US GAAP?

A
  1. Conv Bonds affect A, L, & SHE in IFRS where they only affect A & L in US GAAP
37
Q

Is the Fair Value Model applicable to Investment Properties under IFRS applicable to debt securities?

A

No

38
Q

How can Bonds Issued under IFRS be recorded?

A
  1. Amortized Cost

2. Fair Value through Profit or Loss

39
Q

Under the Market Value Method, how is the conversion of Convertible Bonds to Common stock recorded?

A

At the market value of either the stock or bonds, whichever is more reliable.

Equity is increased by:
Common Stock which equals the Shares x Par Value
APIC which equals the Shares x Market Value - Value of the Common Stock

The Offsetting entries are:
Gain/Loss
Face Value of Bond
Discount/Premium of Bond

40
Q

Under the Book Value Method, how is the conversion of Convertible Bonds to Common Stock recorded?

A

Equity is increased by:
Common Stock = Carrying Value of Bonds
APIC is plugged from the difference between the Common Stock

B/P is debited at Face Value
Discount/Premium is also debited

41
Q

How do you calculate stock purchase warrants?

A

Number of warrants x market value

Subtract this from premium offset

42
Q

Discount on Bonds Payable increases what?

A

Interest Expense each period

43
Q

A premium on bonds payable decreases what?

A

Interest Expense each period

FAR (28 decks)

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