Financial Reporting II Chapter 14

constant

allocating the discount or premium equally over the life of the bonds by the straight line method results in a __ dollar amount of interest each period

detachable stock purchase warrants

another less common way to sweeten a bond issue is to include these; gives the investor an option to purchase a stated number of shares of common s tock at a specified option price

expense

any additional consideration provided to induce conversion of convertible debt is recorded as an __ of the period

gain or loss

any difference between the outstanding debt and the amount paid to retire that debt represents a:

debt

because of the inseparability of their debt and equity features, the entire issue price of convertible bonds is recorded as __, as if they are nonconvertible bonds

premium

bonds are sold at a __ if the effective rate is less than the stated rate

discount

bonds are sold at a __ if the stated rate is less than the effective rate

debenture bond

most corporate bonds; secured only by the full faith and credit of the issuing corporation, not backed by specific assets; holders usually have the same standing as general creditors

same

notes are accounted for in the __ way as bonds

operating

paying or receiving interest is a(n) __ activity

market rate

the interest rate in the note is likely to be equal to the:

two different securities

the issue price of bonds with detachable warrants is allocated between: on the basis of their fair values

bonds

the most common form of corporate debt

unaffected

the premium is __ by debt issuance costs because they are recorded in a separate account

bond indenture

the specific promises made to bondholders are described in this document

underwriting fee

the spread between the price the underwriter pays and the resale price; investment banks "underwrite" by committing to purchase bonds at a set price and absorb any risks accociated with a new issue

convertible bonds

these are retired as a consequence of bondholders choosing to convert them into shares of stock

convertible bonds

these can be exchanged for shares of stock at the option of the bondholder

serial bonds

these provide a more structured way to retire bonds on a piecemeal basis; retired in installments during all or part of the life of the issue

debt issue costs

these, such as legal and accounting fees and printing costs, are recorded separately and are amortized over the term of the related debt; debt this asset account that is then allocated to expense over straight-line basis

bond

this divides a large liability into many smaller liabilities (1k or 5k)

interest paid

this is the amount specified in the bond indenture; the stated rate times the face amount

mortgage bond

this kind of bond is backed by a lien on specified real estate owned by the issuer; less risky, so lower interest rate

zero coupon bond

this pays no interest, but offers a return in the form of a deep discount from the face amount

favorable financial leverage

this situation is when a company earns a return on borrowed funds in excess of the cost of borrowing the funds, and shareholders are provided with a total return greater than what could have been earned with equity funds alone

interest expense

this varies as the balance of the note changes over time

note payable

when a company borrows cash from a bank and signs a promissory note, the firm's liability is reported as:

early extinguishment of debt

when debt of any type is retired prior to its scheduled maturity date

private placement

when the issuing company choses to sell the debt securities directly to a single investor; issue costs are less

zero

whether bonds are issued at a premium or at a discount, the outstanding balance becomes __ at maturity

changes

if a company chooses the option to report at fair value, then it must report __ in fair value in the income statement

substance

in accounting, look beyond the form of the transaction and record its:

financing

borrowing is a(n) __ activity

installments

car and house notes usually call for payment in monthly _ rather than by a single amount at maturity

fair value

companies are not required to, but have the option to, record some or all of their financial assets and liabilities at their:

imputing

deciding what the appropriate rate should be for a note

more

discounts and premiums are __ likely for bonds as for notes

less

discounts and premiums are __ likely for notes as for bonds

subordinated debenture

exception to the equal rule; not entitled to receive any liquidation payments until the claims of the other specified debt issuances are satisfied

interest

for debt, __ is the effective interest rate times the amount of the debt outstanding during the interest period

changing debt balance

for the effective interest method, the dollar amounts of interest vary over the term to maturity because the percentage rate of interest remains constant but is applied to a:

straight line method

for this, the company determines interest indirectly by allocating a discount or a premium equally to each period over the term to maturity

investing

lending is a(n) __ activity

creditor

liabilities signify __'s interest in a company's assets

single amount

long term debt is usually reported in a __ __ net of discounts or premium, rather than at is face amount accompanied by a separate valuation account for the discount or premium

present values

long term liabilities are reported at their:

callable

most corporate bonds are this; allowing the issuing company to buy back outstanding bonds from bondholders before their scheduled maturity date

effective interest method

recording interest each period as the effective market rate of interest multiplied by the outstanding balance of the debt during the interest period