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INTERMEDIATE ACCOUNTING 2 CHAPTER 14
Long Term Debt - Answers -Consists of probable future sacrifices of economic benefits arising fro present obligtions that are not payable within a year or the operating cycle of hte company, whichever is longer
Long Term liabilities - Answers -Bonds payable, long-term notes payable, mortgages payable, pension liabilities, and lease liabilities
Indenture or agreement includes - Answers -The amount authorized to be issued, interest rate, due date(s), call provisions, property pledged as security, sinking funds requirements, working capital and dividend restrictions, and limitations concerning the assumption of additional debt.
Bond Indenture - Answers -A promise to pay (1) a sum of money at a designated maturity date, plus (2) periodic interest at a specified rate on the maturity amount (face value).
Typical face value of a bond - Answers -$1,
Secured Bonds - Answers -Backed by a pledge of some sort of collateral. Mortgage bonds are secured by a claim on real estate. Collateral trust bonds are secured by stock and bonds of other corporations.
Debenture Bond - Answers -An unsecured bond. A "junk bond" is unsecured and also very risky, and therefore pays a high interest rate. Companies often use theses bonds to finance leveraged buyouts
Term bonds - Answers -Bond issues that mature on a single date
Serial Bonds - Answers -Issues that mature in installments. Serially maturing bonds are frequently used by school or sanitary districts, municipalities, or other local taxing bodies that receive money through a special levy.
Callable bonds - Answers -give the issuer the right to call and redeem the bonds prior to maturity
Convertible bonds - Answers -If bonds are convertible into other securities of the corporations for a specified time after insuance
Commodity Backed Bonds - Answers -Developed in an attempt to attract capital in a tight money market - also called "asset linked bonds" are redeemable in measures of a commodity, such as barrels of oil, tons of coal, or ounces of rare metal.
Deep Discount Bonds - Answers -Also called "zero interest debenture bonds" are sold at a discount that provides the buyer's total interest payoff at maturity
Registered Bonds - Answers -Bonds issued in the name of the owner - and require surrender of the certificate and insurance of a new certificate to complete a sale.
Bearer or Coupon Bonds - Answers -Not recorded in the name of the owner and maybe transferred form one owner to another by mere delivery
Income Bonds - Answers -Pay not interest unless the issuing company is profitable
Revenue Bonds - Answers -The interest on them is paid from specific revenue sources, most frequently issued by airports, school districts, counties, toll road authorities, and governmental bodies
Steps for issuance and marketing of bonds - Answers -(1) issuing company must arrange for underwriters that will help market and sell the bonds (2) must obtain the Securities and Exchange Commission's approval of the bond issue, undergo audits, and issue a prospectus. (3) company must generally have the bond certificates printed.
Selling price of bonds - Answers -Is set by the supply and demand of buyers and sellers, relative risk, market conditions, and the state of the economy
Present value of its expected future cash flows - Answers -Consists of (1) interest (2) principal
Stated, Coupon, or Nominal rate - Answers -The interest rate written in the terms of the bond indenture (and often printed on the bond certificate) - the issuer of the bond sets this rate
Par Value, Principal amount, maturity value - Answers -The stated rate is expressed as a percentage of the face value of the bonds
Discount or premium - Answers -The difference between the face value of and the present value of the bonds determines the actual price that buyers pay for the bonds
Discount bonds - Answers -If the bonds sells for less than face value
Premium Bonds - Answers -If the bonds sell for more than face value
Effective Yield or Market Rate - Answers -The rate of interest actually earned by the bondholders
If bonds sell at a discount - Answers -The effective yield exceeds the state rate
If bonds sell at a premium - Answers -the effective yield is lower than the state rate
Both the effective interest and straight line methods result - Answers -In the same total amount of interest expense over the term of the bonds
Generally Accepted Accounting Principles - Answers -Require use of the effective interest method - when the annual amounts are materially different
Discount on bonds payable - Answers -Is not an asset
Contra Account - Answers -Discount on bonds payable - a liability valuation account
Adjunct Account - Answers -Premium on bonds payable is a liability valuation account. It adds to the face or maturity amount of the related liablity
Companies report bond discounts and bond premiums - Answers -As a direct deduction from or addition to the face amount of the bond
The issuance of bonds involves - Answers -Engraving and printing costs, legal and accounting fees, commissions, promotion costs, and other similar charges
Unamortized Bond Issue Costs - Answers -Companies are required to charge these costs to an asset account (usually long-term) - companies then allocated the unamortized bond issue costs to expense of the life of the debt
The cost of issuing bonds - Answers -Reduces the proceeds of the bonds issued and increases the effective interest rate
Unamortized bond issue costs - Answers -Are treated as a deferred charge and amortized over the life of the debt
Extinguishment of debt - Answers -Recording the payment of debt
If the company holds the bonds to maturity - Answers -The company does not compute any gains or losses
Reacquisition Price - Answers -Any call premium and expense of reaquisation
Gain from extinguishment - Answers -Any excess of the net carrying amount over the reacquisition price
Loss from extinguishment - Answers -The excess of the reacquisition price over the net carrying amount
At the time of reacquisition - Answers -The unamortized premium or discount, and any costs of issue applicable to the bonds must be amortized up to the reaquisition date
Reported as a current liability - Answers -Long term debt that matures within one year, unless using no current assets to accomplish redemption
No current Debt - Answers -If the company plans to refinance debt, convert it into stock, or retire it from a bond retirement fund
Debt to asset ratio - Answers -Measures the percentage of the total assets provided by creditors - Total liabilities/Total assets
Times interest earned ratio - Answers -Indicates the company's ability to meet interest payments as they come due - Income before income taxes and interest expense/Interest expense
The higher the percentage of total liabilities to total assets - Answers -The greater the risk that the company may be unable to meet its maturing obligations
Describe the formal procedures associate with issuing long-term debt - Answers -In curing long-term debt is often a formal procedure. THe bylaws of corporations usually require approval by the board of directs and the stockholders before the corporation can issue bonds or can make other long-term debt arrangements. Generally, long-term debt has various covenants or restrictions. The covenants and other terms of the agreement between the borrower and the lender are stated in the bond indenture or note agreement.
Note Disclosures - Answers -Generally indicate the nature of the liabilities, maturity dates, interest rates, call provisions, conversion privileges, restrictions imposed by the creditors, and assets designated or pledged as security
Bond Indenture - Answers -The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the
Coupon rate, nominal rate, or stated rate - Answers -The interest rate written in the terms of the bond indenture is known as the
Callable Bond - Answers -A bond for which the issuer has the right to call and retire the bonds prior to maturity
Registered bond - Answers -A bond issued in the name of the owner is a
False - Answers -When the effective rate of a bond is lower than the stated, the bond sells at a discount
Greater than the stated rate - Answers -If a bond sold at 97, the market rate was
True - Answers -The loss recorded by the creditor in a troubled debt restructuring is based on the expected future cash flows discounted at the historical effective interest rate
