ACCT405 chap 14

FV of an installment note is

0

debt issuance costs are recorded as

a direct reduction from the related debt securities

for installment notes: principal reduction per period =

cash amount - interest component

how are the proceeds from debt issuance shown on the statement of cash flows

cash flow from financing

straight-line method

disc/prem is allocated equally to each period over the term-to-maturity (= prem or disc / n)

for installment notes: interest expense =

effective interest rate * outstanding balance of debt

the rate of interest that actually is incurred on a bond payable is

effective rate

bonds payable should be reported as a long-term liability in the balance sheet of the issuing corp at the

face amount less any unamortized discount or plus any unamortized premium

what interest rate do callable bonds have compared to plain vanilla?

higher interest rates

when a bond issue sells for less than its face value, the market rate of interest is

higher than the stated rate of interest

how does a co decide to classify callable bonds as current v noncurrent?

if they have INTENT and ABILITY

amortization of debt issuance cost is reported as

interest expense (generally w straight line)

for a bond issue that sells for more than the bond face amount (at a premium), the effective interest rate is

less than the rate stated on the face of the bond

fair value option: any portion of gain or loss that is a result of a change in the general (risk-free) interest rate is reported as

net income

zero-coupon bonds

offer a return in the form of a deep discount off the face value

Fair value option: any portion of gain or loss that is a result of a change in the "credit risk" of the debt is reported as

other comprehensive income

the price of a corporate bond is the present value of its face amount at the market or effective rate of interest

plus the present value of all future interest payments at the market or effective rate of interest

the interest rate that is printed on the bond certificate can be referred to as the

stated rate or nominal rate or coupon rate

if debt is scheduled to mature, it normally gets classified as a current liability in the period prior to extinguishment UNLESS

the co will pay off this debt w a LT asset OR the co expects to refinance the current obligations (with LT debt or equity)

early extinguishment by purchasing w cash: the co computes an ordinary gain/loss on early extinguishment as:

the diff bt the reacquisition P and the net carrying value of debt

interest expense is

the effective interest rate times the carrying value of the debt outstanding at the beginning of the interest period

when bonds are retired prior to their maturity date

the issuing co probably will report an ordinary gain or loss

Crawford Inc has bonds outstanding during a year for which the fair value rises due to a change in the general interest rate. crawford elected the fair value option for the bonds upon issuance. what will the co report for the bonds in its income statements for the year besides interest expense?

unrealized holding loss

for a zero coupon bond:

we accrue interest expense each period at the effective rate even tho no cash interest is actually paid

troubled debt restructurings

when the original terms of debt agreement are modified in response to financial difficulties experienced by the borrower

interest expense (for effective method)

= carrying value * market yield. amortization is of the disc/prem is the diff bt cash interest paid (face amount * stated rate) and interest expense (CV * mkt rate)

LT liabilities are obligations whose due date is greater than 1 year (or the current operating cycle) OR

are expected to be paid with non-current assets, other non-current liabilities, or equity

carrying value =

bond payable (face amount) +/- disc or premium - issuance cost OR PV of REMAINING future CF, discounted at the mkt rate at issuance