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
