ch 14. bonds and long-term notes
L
interest accrues as time passes on long-term ___, the requirement of future cash payments, future cash payments are certain/estimable
supplement disclosures
should provide investors and creditors info abt the risk associated w companies' financial obligations
unrealized holding loss (OCI)
Glen Inc. elected to report its bonds at fair value. If the unadjusted carrying value of the bonds is $500,000 and the fair value rises to $515,000 due to the credit risk associated with the bonds, Glen should debit
notes payable
Schulz Company borrows cash from a bank and signs a promissory note. The bank should record
debenture bond
a bond that is secured only by the faith and credit of the issuing corporation
bond indenture
a doc that describes the specific promises made to bondholders
semiannually
although the interest on a bond is often stated as an annual rate, interest is frequently payable
5
as part of the disclosures relating to long-term L, companies should disclose the aggregate amounts payable for each of the next __ yrs
bond yields
bond issues are priced to ___ the market rate; supply and demand influence ___ ___
fair value
bonds payable - publically traded bonds
convertible bonds
bonds that can be exchanged for shares of stock at the option of the bondholder; makes bonds more attractive to investors
open market
bonds that do not include a call provision may be repurchased on the
convertible bonds
bonds that permit bond holders to exchange their bonds for common stock
financing act
borrowing
stock warrants, additional cash, favorable conversion ratios
common methods used by bond issuers to induce bond holders to convert their bonds to common stock are
retire bonds, maturity date
common strategies for debtors to ___ ___ prior to the ___ ___: purchasing bonds on an open market and including a call feature when the bonds are issued
financial reporting
decision makers should consider the chance of recurrence of gains and losses and the existence of "off-balance-sheet" financing arrangement to min their risk
net income
for bonds reported under the fair value option, changes in fair value due to interest rate changes are reported in
present value (PV)
generally, L are valued at their
discount
if a bond issues for 99, this means that the company issued the bond at a
value
if an asset is exchanged for notes payable and the stated interest rate does not closely reflect the market rate at time of negotiation, the market rate should be est w reference to the ___ of the asset/service exchanged
implicit
in situations when the interest rate is not readily apparent, the rate used to measure and account for the transaction should be the ___ interest rate
fair value
info relating to financial instruments that must be disclosed either on the face of the balance sheet or in the notes to the financial statements
investing act
lending
bond(s) payable/L
mirror image of investments in bonds
bonds
most common type of corporate debt
PV of principal and interest payments
notes not traded on market exchanges
corporate issuing bonds
obligated to repay a stated amt at a Specific maturity date and to pay periodic interest between the issue date and maturity
broken into small portions
one of the advantages associated w bonds is that a relatively large amount of debt can be
operating act
paying/receiving interest
effective interest rate
periodic interest expense on L is calculated by multiplying the amount of debt outstanding during the period by the
automobiles, land, buildings
purchases frequently involve installment notes payable
effective interest method
recording interest each period as the effective rate of interest multiplied by the outstanding balance of the debt during the interest period
times interest earned ratio
the company's ability to pay its cost of borrowing and the margin of safety in terms of paying its fixed interest
effective interest rate
the creditworthiness of the company issuing the bonds will affect the company's
default risk
the debt equity ratio can provide information regarding a company's risk that it will be unable to pay its debt when due
PV
the issue price of bonds is calculated as the ___ of all the cash flows required of the bonds
creditworthiness, company
the market rate for a specific bond issue is influenced by the ___ of the ___ issuing the bonds
credit risk
the risk that bondholders will not receive interest and principal payments when due
convertible bonds
to sell the bonds at a higher price, use a medium of exchange in mergers and acquisitions, and enable smaller/debt-heavy companies to gain access to the bond market
debt
type of information must be disclosed related to ___: - nature of the liability - call and conversion options - aggregate amount payable for next 5 yrs - interest rates
bond issue costs
typically are incurred related to both privately placed and publicly sold bonds
periodic payments on installment notes
typically include a portion that reflects interest at the effective interest rate and a portion that reduces the outstanding loan balance
installment notes
typically involve the purchase of assets and periodic payments include principal and interest; require installment payments over time
B/P
valid valuation methods for reporting ___ are the current fair value on each reporting date and the amortized cost
