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Flashcards in Bonds/ Troubled Debt Restructure Deck (46)
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1

What is a serial bond?

Any bond that matures in installments

2

What is a term bond?

Any bond that matures on a single date

3

What is a debenture bond?

A bond not secured by any collateral

4

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

5

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

6

How is the present value of a bond calculated?

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)

7

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

PURE LEGAL Include Engraving; Printing; Legal; Underwriter; Registration

Debited to a deferred charge account BIC

and amortized over life of Bond using S/L

Bond Proceeds - Bond Issuance Costs =Net Bond Proceeds

Time of amortization begins when issued

8

How are bonds reported when classified as trading securities?

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

9

How are bonds amortized under the interest method?

Both discount and premium amortization amounts increase each year

 

Carrying value x effective interest rate

= interest expense/income

10

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

11

What is the stated rate for a bond?

Rate on the face of the bond

12

What is the market rate on a bond?

Rate that bonds are currently selling for

13

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

14

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

15

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.

16

When does interest expense start accruing on a bond?

When the bonds are issued

17

How is an interest payment on a bond calculated?

Cash for payment : Stated rate x Face amount

18

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

Interest expense : effective yield x carrying value

Interest expense - cash payment

= discount/premium amortization

19

What are convertible bonds? Which recording method is used when converted?

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

How is the gain or loss on retirement of bonds recorded?

Gain or Loss is Ordinary Extraordinary if both unusual and infrequent

bonds payable

premium

     discount

     cash

 

 

 

21

When is a gain recognized in a debt restructuring?

GAIN RECOGNIZED UNDER SETTLEMENT OF DEBT IS DIFFERENT

CV > SUM OF FUTURE PAYMENTS

 

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

22

What is the gain recognized under a settlement of debt?

Gain recognized:

Carrying amount of debt

less: cash paid to settle

= Gain

OR

Carrying amount of debt

Less: FV of asset given (revalued)

= GAIN

 

 

23

For a creditor; how is a loan impairment recorded?

Carrying amount is < than PV of future payments ( using old rate as effective rate)

= Impairment loss

24

Gain on repurchase of bonds and Loss on sale of bonds - presentation in the FS

Gain - shown separately in Other Revenues and Gains

Loss - shown separately in Other Expenses and Losses

THEY ARE SHOWN SEPARATELY

25

Bond Redemption:

Example: 8% 1,000,000 face 10% yield rate

carrying value 1/01/04 940,000

redeemed at 6/30/04 for 102

after paying interest Compute gain/loss

1. compute carrying value up to redemption date

2. compute discount/premium amortization

3. carrying value - cash paid to redeem = gain/loss

940,000 x 10% x 1/2  47,000

1000,000 x 8% x 1/2  40,000

Discount amort           7,000

carrying value         940,000

   plus discount           7,000

total                         947,000

less;cash paid       1,020,000

loss                           73,000

                

26

Quick computation for bond sale/redemption gain or loss

1. Compute effective interest up to sale date

2. compute stated interest up to sale date

3. difference is the premium/discount amort

4. Add/Deduct from carrying value before sale to get the updated carrying value

5.compute gain or loss = CV - cash received or paid

27

Troubled Debt - Modification of terms Assume FV option is not elected

Carrying value > sum of future payments (undiscounted)

 

Principal

+ Interest payable balance

= Total amount due

Less: Future payments: principal  + interest (undiscounted)

=Gain on restructuring

Notes Payable

Interest payable (condoned)

           Notes Payable (new principal)

            Gain on restructuring

NOTE: FUTURE INTEREST PAYABLE IS NOT PART OF THE JOURNAL ENTRY

28

Troubled Debt - Settlement by transfer of property

1. write up asset to FV

Asset xx

        Gain on transfer xx

2. Compute gain/loss

Notes Payable

Interest Payable

         Notes Payable (new)

         Asset (at FV) Gain on settlement of debt

Computation of gain/loss: CV > Restructuring gain/loss

                                           FV > Transfer gain/loss

                                            BV

29

Troubled Debt - Issuance of Stocks

Record stocks at FV

Notes Payable

Interest Payable

        CS (at par)

        APIC - CS

        Gain on settlement of debt

 

 

30

Loan impairment - creditor's books

Bad debts (impairment loss)

      Notes receivable

      Interest receivable

      Valuation allowance

** set up amortization sched - effective interest method

** valuation allowance is the premium/discount

** interest/cash received = new principal x new rate

**interest revenue = new CV x old rate