# Shared Flashcard Set

## Details

F5 - Leases, Liabilities, and bonds
F5 - Leases, Liabilities, and bonds
126
Accounting
Professional
11/04/2012

Term
 Definition of Annuities
Definition
 A large # of business transactions involve multiple payments or receipts. Bond interest payments and lease rental payments are two examples. Transactions that results in identical periodic payments or receipts at regular intervals involve annuities.
Term
 Ordinary annuity also called
Definition
 annuity in arrears - payments are made at the end of each period
Term
 An annuity is classified as an annuity due
Definition
 also called annuity in advance if payments/receipts occur at the beginning of each period.
Term
 What is the only diff btw ordinary annuity vs. annuity due
Definition
 The timing of payments for both present value and future value annuities. In calculating the present value of an ordinary annuity, the number of payments is equal to the number of interest periods. In calculating the present value of an annuity due, the number of interest periods is one less than the number of payments.
Term
 how many types of present value concept
Definition
 6.Present value of \$1 - one shotFuture value of \$1 - one shotPresent value of an ordinary annuity - end of the year - series of paymentsFuture value of an ord. annunity - end of the year - series of paymentspresent value of the annuity due - beg of year - series of paymentsfuture Va of the Annu due - beg of year- series of payments
Term
 Present value of \$1
Definition
 Capital lease buyout at the end of leasebond principal payoff at the end of termUS savings bond - future value as the face but present value significantly low.
Term
 Future Value of \$1
Definition
 The future value of \$1 is more easily understood as compound interest. amount it would accumulate to at a future point in time if \$1 were invested now. bank savings account is an examples.
Term
 formula to calculate FV
Definition
 FV = P (1 + r)Yexp - rate 10%, P= 200000, 5FV = 200000 (1+.10)^5FV = 200000 (1.611)FV = 322,200
Term
 Present value of an ordinary annunity
Definition
 is the current worth of a series of identical periodic payments to be paid in the future - periodic lease payments, periodic bond payments. Winning the lottery.
Term
 future value of an ordinary annuity
Definition
 is the sum to be received in some point in future of identical periodic investments made from the present until that future point - investing in IRA (retirement plan)
Term
 present value and future value of annuity due
Definition
 determined by adding 1 to the present value of an ordinary annuity of 1 for n periods the present value of an annuity due of 1 for n+1 periods may be found
Term
 formula for PV
Definition
 PV=Future amount * present value factor
Term
 Define lease
Definition
 A lease is a contractual agreement btw a lessor, who conveys the right to use real or personal property (an asset), and a lessee, who agrees to pay periodic rents over a specified time.
Term
 lessee
Definition
 Rental: operating lease (US GAAP/IFRS) - Sale (in substance) capital lease (us gaap) - Finance lease (IFRS)
Term
 Lessor
Definition
 Rental: Operating (US GAAP/IFRS) Sales (in substance) : Sales-Type or Direct Financing Type (US GAAP) Finance Lease (IFRS)
Term
 Operating Leases defination
Definition
 Rental agreement - it includes a lessor, who collects rent , and a lessee, who uses the leased asset and pays periodic rent for such use. The lessee merely uses the asset; there is no transfer of ownership or of any risk or benefit of ownership.
Term
 accounting for Operating leases: Lessee Accounting: Lease rental expense
Definition
 The lessee records rent expenses over the lease term, usually on a straight-line basis unless other methods are warranted. (for example, lease expense can be tied to sales, to consumer price index, or to the prime interest rate) Rent exp. Dr, cash/rent payable cr.
Term
 accounting for Operating leases: Lessee Accounting: Lease Bonus (prepayment)
Definition
 Prepayment for future expenses should be classified as an asset (deferred charge)and amortized using the straight line method over the life of the lease.
Term
 Leasehold improvements
Definition
 is one that is permanaently affixed to the property and reverts back to the lessor at the termination of the lease. In general, if this property is not moveable from the premises by the tenant, it is a leasehold improvement. Air conditioning ducts would be considered a leasehold improvement, while a painting hanging on a wall would not.
Term
 how to capitalize leaseholders improvement
Definition
 the value of leasehold improvements should be capitalized and added to the property plant and equipment section or the intangible asset section of the balance sheet.
Term
 leaseholder improvement : depreciation - useful life or lease term
Definition
 leasehold improvements should be depreciated (amortized)over the lesser of: a. Lease life, b. Asset/improvement life - "lesser of)
Term
 what is rent kicker
Definition
 A premium rent payment required for specific events. 1. period expense.
Term
 define refundable security deposit
Definition
 is reported as an asset until refunded by the lessor.
Term
 Non Refundable security deposit
Definition
 deferred by leesor (unearned revenue)and capitalized by the lessee (prepaid rent expense) until the lessor considers the deposit earned.
Term
 Prepaid Rental GAAP and TAX rules
Definition
 Report Prepaid rental income when earned, Tax: report PP rental income when received.
Term
 lease bonus - leesor
Definition
 the lease bonus is deferred unearned income and amortized into income over the life of the lease.
Term
 Capital (US)/Finance LEase (IFRS) =
Definition
 purchase/ownershiptransfers substantially all of the benefits and risks inherent in ownership of property to the lesseeThis is an accounting transaction, which is, in substance, an installment purchase in the form of a leasing arrangement. The lessee accounts for this type of lease as the acquisition of both an asset(leased asset under capital lease) and a related liability (obligation under capital lease).
Term
Definition
 must meet just one condition: if meet then dr. fixed asset and cr. liability.1. Ownership transfers at end of lease (upon final 2. written option for bargain purchase3. ninety 90% of leased property FV<= PV of lease payments 4. 75% or more of asset economic life is being committed in lease term.
Term
 Lesse Finance LEase Criteria IFRS
Definition
 Under IFRS lease classification depends on the substance of the transaction rather than on the form of the contract. IFRS defines a finance lease as a lease in which substantially all the risks and rewards inherent in ownership are transferred to the lessee. Any lease that meets this definition is classified as a finance lease. the 4 us gaap capital lease criteria meet this definition and therefore these criteria indicate a finance lease under IFRS
Term
 IFRS - capitalization criteria
Definition
 Owes facs1. the lease transfers ownership of the asset to the lessee by the end of the lease term2. the lease contains a written bargain purchase option.3. The lease term is for the major part of the economic life of the asset even if title is not transferred. note not 90% like GAAP4. The present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset. 5. Gains and losses from the fluctuation in the fair value of the residual accrue to the lessee. 6. The lessee has the ability to cont. the lease for a secondary period at a rent that is substantially lower than market rent. 7. The lessee can cancel the lease and the lessor's losses associated with the cancellation are borne by the lessee.8. the leased assets are of such a specialized nature that only the lessee can use them without modification.
Term
 Lessor - sales type/direct financing type criteria (US GAAP)
Definition
 under us GAAP if a lease at inception, meets all 3 of the following conditions, it shall be classified by the lessor as a sales type or direct financing lease, whichever is appropriate. L. Lessee "owns" the leased property (meets any one of the 4 lessee's criteria)U - Uncertainties do not exist regarding any unreimbursable costs to be incurred by the lessor.C - Collectability of the lease payments is reasonably predictable.
Term
 Lessor: Sale-type lease
Definition
 2 profits: Gain on sale and interest inc.In a sales type lease, the fair value of the leased property at the inception of the lease differs from the cost or carrying amount to the lessor. This diff gives rise to a manufacturers or dealers profit or loss. it must be remembered that a lessor need not be dealer or manufacturer to realize a profit or loss, if at inception of the lease the fair value differs from the cost or carrying amount.
Term
 Direct Financing lease
Definition
 1 Profit = Interest Income: In a direct financing lease, the fair value of the leased property at the inception of the lease is the same as the cost or carrying amount. There, there are no manufacturers or dealers profit or loss.
Term
 Lessor - Financing Lease Criteria (IFRS)
Definition
 Under IFRS a lessor classifies a lease as a finance lease if the lease transfers substantially all the risks and rewards inherent in ownership to the lessee. In other words, the lessee and the lessor use the same criteria for lease classification. As a result under IFRS, the lessee and the lessor will, in most cases, classify a lease consistently as a finance lease or an operating lease.
Term
 Lessee capital (finance) lease accounting = buyer - entry
Definition
 the lessee treats the capital finance lease as if an asset were being purchased over time. that is, as a financing transaction in which an asset is acquired and a corresponding obligation (liability) is created. DR. Fixed asset - Leased propertyCR. Liability - obligation under capital finance lease
Term
 Record the lease: Capitalized amount include
Definition
 The lessee records the lease as an asset and a liability at the lower (lesser) of: 1. fair value of the asset at the inception of the lease, or2. cost=present value of the minimum lease paymentsa. include (all payments that the lessee is obligated to make)i. required paymentsii. Bargain purchase optionwhen the lease contains a bargain purchase option, the lease obligation includes the present value of the payment required to exercise the bargain purchase option in addition to the present value of the minimum lease payments.iii. Guaranteed Residual valueThe guaranteed residual value is the amount guaranteed by the lessee to the lessor for the estimated residual value of the asset at the end of the lease term. The lease obligation includes the present value in addition to the present value of the minimum lease payments.
Term
 Record the lease: Capitalized amount excluded
Definition
 Executory cost: Insurance, maintenance, and taxes can be paid by the lessor or lessee. If the lessor pays them, a portion of each lease payment representing executory costs is excluded from the calculation of minimum lease payments. If the lessee pays these costs directly, they are not included in the minimum lease payments. ii. Optional buyout (not required and not a bargain) - under ifrs initial direct costs of the lease paid by the lessee are added to the amount recognized as a finance lease asset. Therefore, at lease inception, the amount of the lease asset and the lease obligation may differ.
Term
 Interest Rate
Definition
 when calculating the present value of the min lease payments, the lessee uses the lower (lesser) of the:1. rate implicit in the lease (if known)2. Lessee's incremental borrowing rate (the rate available in the market to the lessee (not prime))
Term
 Terms to use in computing Depreciation of the Asset: Depreciation Method
Definition
 The leased asset should be depreciated in a manner consistent with the lessee's normal policies. Generally Straight line method - Capitalized lease assets - salvage value= Depreciable basis /periods of benefits = Depreciation Expense per period.
Term
 Terms to use in computing Depreciation of the Asset: Ownership transfer and written Bargain
Definition
 The estimated economic life of the asset is used if the lessee takes ownership of the leased asset by the end of the lease or if there is a bargain purchase option as part of the agreement. b. Ninety % FV and 75% Life: The lessee uses the lease term if the lessee does not take ownership of the asset by the end of the lease or if there is not a bargain purchase option. - o or w = asset life, N or S = over period of benefit - lease term .
Term
 Terms to use in computing Depreciation of the Asset: Period of benefit (depreciable life) IFRS
Definition
 The depreciation period is the shorter of the lease term and the useful life of the asset. If there is a reasonable certainty that the lessee will own the leased asset after the lease term, then the leased asset should be depreciated over its useful life.
Term
 LEase amortization-liability and asset on lessee's books
Definition
 The obligation under capital (finance) lease account and the related Leased Asset account are recorded initially at the same amount. However subsequent amortization of each account takes place independently and results in diff account balances by the end of the 1st yr. The lease liability is amortized using effective interest method.
Term
 1st payment of annuity due is all
Definition
 Principal
Term
 Capital lease disclosure
Definition
 Disclose everything = the more the better. 5 yr rule.
Term
 Summary of Lessee CApitalization Rules (US GAAP): Capitalize
Definition
 As PP&E on the balance sheet, the leased asset at the LESSER of: Cost=PV of Future payments1. include:a. guaranteed residual value by lesseeb. Bargain purchase option (if applicable)2. Exclude:Executory costs (insurance, Taxes, ad repair and maintenance)3. Discount Rate: The discount rate used to calculate present value is the lesser of: a. Rate implicit in the lease (if known)b. Incremental borrowing rate.FV=Ownership = capitalize: PV of payments and required buyout = Depreciation Life: Asset LifeWritten = Capitalize-pv of payments and bargain buyout - depreciation life: Asset life. Ninety % FV = Capitalize -PV of payments (ignore options)- Dep: lease life. 75% life = PV of payments ignore option = Dep: Lease life.If a lease meets more than the order of priority for applying the rules is the exact way they are spelled - O-W-N-S
Term
 Lessor Accounting Summary
Definition
 Seller with all the lucA. Recording a Sales-Type (Finance) leaseunder IFRS, a sales-type lease is referred to as a finance lease of an asset by a manufacturer or dealer lessor. The terms that are important to know for sales-type finance leases include: 1. Gross Investment (lease receivable) The minimum lease payments plus any unguaranteed residual value accruing to the benefit of the lessor. This is recorded as Lease payments receivable on the lessor's book. 2 profits: Gain on sale and interest income. formula lease payments(gross)+unguaranteed residual value (estimated fair value at end) = Gross investment.Net investment: Lease payment (principal) + Unguaranteed residual value = Gross investment #1 * PV = Net investment. This is computed as the sum of the present value of the min lease payments including the periodic lease payments, bargain purchase option, or guaranteed residual value) and the present value of any unguaranteed residual value accruing to the benefit of the lessor, using the interest rate implicit in the lease. unearned interest revenue: the gross investment less the net investment equals the unearned interest revenue. The unearned interest revenue is recognized over the life of the lease using the effective interest method and is included in the balance sheet as a deduction from the gross investment. formula Gross investment#1 - Net investment ##2= unearned interest revenue -future interest. Cost of good sold: COst of asset(sold) - PV unguaranteed residual value(what you get back) = COGS(net given up)Sales price (rule of sales type lease) = cost + profit = Present Value=selling price =FV - when sales price not given assume the above.
Term
 summary: recording a direct financing (finance) lease
Definition
 Under IFRS, a direct financing lease is referred to as a finance lease. Under both IFRS and US GAAP, no manufacturer's or dealer's profit is realized in a direct financing lease because the fair value of the leased property equals the cost or carrying value at the inception of the lease. The information necessary to record this type of lease is: Seller (with all the luck) 1 profit = interest incomeGross investment = lease payments & unguaranteed residual value (gross) = Gross investment. Net investment: Gross investment #1*PV = Net investment (net principal)unearned interest revenue: Gross investment - net investment = unearned revenue. note no COGS, no Sale - as only financing.
Term
 Sale leaseback concept
Definition
 the owner of a property (seller -lessee) sells the property simultaneously leases it back from the purchaser-lessor. Usually there is no visible interruption in the use of the property. S LB are treated as a financing transaction where profit may be deferred and amortized. Under US GAAP 2 questions are involved in determining the treatment of any profits: 1. is the lease a capital or operating lease?and 2. what portion of the rights to the leaseback property is retained? Under IFRS the treatment of any profits is determined by whether the lease is an operating lease or a finance lease.
Term
 Selling Price: Sale-leaseback
Definition
 Selling price is the negotiated price in the sale leaseback agreement. It may be less than, equal to or greater than the market value of the property, depending on the negotiated terms of the sale-leaseback.
Term
 Sale-leaseback: Profit or loss on sale
Definition
 is the amount that would have been recognized by the seller lessee assuming there was no leaseback. it is calculated by subtracting book value from FV (sales price)General rule: over 90% = loan10-90% = rules0-10% = ignore.
Term
 Excess profit on Sale-leaseback (us GAaP only): Operating lease
Definition
 rent back: The amount of profit on the sale that exceeds the present value of the min lease payments Sales price-Asset NBV=Tentative gain-PV min. lease payment=Excess gainbasically gain on sale - give back = keep
Term
 Excess profit on Sale-leaseback (us GAaP only):Capital lease excess profit
Definition
 The amount of profit on sale that exceeds the recorded amount of the asset. note that this amount will be the same as in an operating lease unless the leaseback asset is recorded at the lower FV. The recorded amount of the leaseback asset is the lesser of1. the FV of the leased property or2. the present value of the min lease paymentsowns back. Sales price - Asset NBV = tentative gain - leaseback asset = Excess gain.
Term
 Accounting by seller/lessee (US GAAP) Accounting of deferred Gain
Definition
 Under US GAAP the amount of the deferred gain by the retained rights to remaining use of the leaseback property. The rights to the remaining use of the property and determined by the present value to rent payment paid by the seller lessee. The seller lessee's right may be categorized as follows. Substantially all rights retained. Rights retained are less than "substantially all" but greater than minor (btw 90-10). Minor rights retained <10%
Term
 Accounting by seller/lessee (US GAAP) Accounting of deferred Gain: Substantially All rights Retained (90%)
Definition
 over 90 % major: defer all gain - The present value of the rent payments is equal to or greater 90 % of the fair value of the property. These leases are usually accounted for as capital leases. Defer all gain and amortize over the leased asset.
Term
 Accounting by seller/lessee (US GAAP) Accounting of deferred Gain: Rights retained are less than "substantially all" but greater than "Minor" (btw 90-10%)
Definition
 90-10% middle - defer gain up to give back - The present value of the rent payment is less than 90 % of the fair value but greater than 10% of the fair value of property at the lease inception. These leases are accounted for as either capital or operating leases, depending on the criteria. Defer gain up to the present value of the min leaseback (operating lease) or capitalized asset (capitalize lease). Gain in excess of this amount is recognized immediately.
Term
 Accounting by seller/lessee (US GAAP) Accounting of deferred Gain: Minor Portion of rights retained by seller-lessee (less than 10%)
Definition
 0-10% minor (recognize gain ignore deferral rules) The present value of the rent payments is 10% or less of the fair value of the property at lease inception. These leases are usually accounted for as operating leases. Recognize gain or loss at the time of the sale leaseback transaction. Gains are not deferred.
Term
 Accounting by seller/lessee (us gaap) Real Economic loss recognize _____
Definition
 Immediately. is when the FV of the property at the time of the sale leaseback is less than book value, in which case the excess of book value over FV is the loss.
Term
 Accounting by seller/lessee (us gaap): Artificial loss
Definition
 When the sale price is below the FV, the loss is deferred and amortized over the leaseback period.
Term
 Amortization of deferred gain: Capital leaseback
Definition
 in a capital leaseback, any deferred gain or loss is amortized in proportion to the amortization of the leased asset life. 1. the deferred gain (or loss) would be recognized as an unearned profit (or loss) on sale leaseback.The unearned profit or loss on sale leaseback would be treated as a valuation account of the leased back asset.
Term
 Amortization of deferred gain: operating leaseback
Definition
 any deferred gain or loss is amortized in proportion to the gross rental expense over the life of the lease1. the deferred gain loss would be recognized as an unearned profit or loss on sale leaseback2. the unearned profit or loss on sale leaseback would be reported as a deferred credit or debit in the balance sheet.
Term
 Accounting by the seller/lessee (IFRS) Finance lease
Definition
 If a saleleaseback transaction results in a finance lease, any profit from saleleaseback transaction is deferred and amortized over the lease term.
Term
 Accounting by the seller/lessee (IFRS) : Operating lease
Definition
 Operating lease: If a sale-leaseback transaction results in an operating lease, profit or loss from the sale leaseback transaction is recognized based on the leased asset's carrying amount, fair value and selling price.a. Sales price at FV (general rule) If the sales price is equal to FV, any profit or loss is recognized immediately (no deferral)b. Sales price above FV: If the sales price is above FV, any profit should be deferred and amortized over the period that the asset is expected to be used.
Term
 Sub-leases - Accounting by original lessor
Definition
 If the original lessee enters into a sublease, the original lessor's accounting for the lease will not change.
Term
 Sublease classification by original lessee and sublessee:
Definition
 when a lessee sublets property to another, the newly created sublease must be classified as either an operating lease or capital lease.
Term
 Sublease classification by original lessee and sublessee: Original lease
Definition
 1. Original lease = Operating leasethe sublease would be an operating lease as well.
Term
 Sublease classification by original lessee and sublessee: Capital lease
Definition
 IF the original lease was a capital lease due to 1. ownership transfer2. written bargain purchase option then the sublease is also capital lease. but if N or SNinety percent FV and 75% of life its an operating lease.
Term
 Recognition of a gain resulting from the sale in a sale-leaseback should be deferred when
Definition
 the seller lessee retains the right to substantially all the remaining use of the property (as in a capital lease)
Term
 Nonrefundable lease bonus should be
Definition
 recognition is deferred and recognized equally over the life of the lease.
Term
 Guaranteed residual value is in effect
Definition
 an additional lease payment and must be included in the calculation of the present value of the min lease payments.
Term
 Long term Liabilities
Definition
 are probable future expenditures associated with current obligations that are not payable within the current operating cycle or reporting year, which ever is greater.
Term
 Examples of long term liabilities
Definition
 Long term promissory notes payable, bonds payable, long term leases, long term contingent liabilities, purchase commitments, equipment purchase obligations, amounts due under deferred compensation agreements, post retirement pension and other benefits payable, other financial instruments, short term debt expected to be refinanced (to the extent of post balance sheet refinancing with support. and deferred income taxes payable.
Term
 Bonds: Bond Indenture
Definition
 The document that describes the contract between the issuer (borrower) and bond holders (lenders)
Term
 Bonds: Face (par) Value
Definition
 is the total dollar amount of the bond and the basis on which periodic interest is paid. Bonds are issued at face (par) value when the stated rate equals the market rate.
Term
 bonds: Stated (nominal or coupon) interest rate
Definition
 The stated interest rate, also known as the nominal interest rate or the coupon rate is the interest to be paid to the investors. This rate is specified in the bond contract.
Term
 Bonds: Market (effective )interest Rate
Definition
 The market interest rate is the rate of interest actually earned by the bondholder and is the rate of return for comparable contracts on the date the bond is issued. Caused by the premium or discount.
Term
 Bonds: Discount
Definition
 If the market rate is higher than the
Term
 Bonds: Discount
Definition
 if the market rate is higher than the stated rate, the bond will be issued at a discount, in which case the bonds sell for less than the face amount to make up for the lower return being provided.
Term
Definition
 if the market rate is lower than the stated rate, the bond will be issued at a premium, in which case the bonds sell for more than the face amount to make up for the higher return being provided.
Term
 Bonds Payable
Definition
 Bonds are one of the most common types of long term liabilities. They are an imp source of long term funding for companies needing large amounts of capital. Bonds represent a contractual promise by the issuing corp to pay investors (bond holders) a specific sum of money at a designated maturity date plus periodic, fixed interest payments (usually made semi annually) based on a percentage of the face amount of the bond.
Term
 Types of Bonds: Debentures
Definition
 are unsecured bonds
Term
 Types of Bonds: Mortgage Bonds
Definition
 are bonds that are secured by real propery
Term
 Types of Bonds: Collateral Trust bonds
Definition
 are secured bonds
Term
 Types of Bonds: Convertible bonds
Definition
 are convertible into common stock of the debtor (generally) at the option of the bondholderNon detachable warrants: The convertible bonds itself must be converted into capital stock.Detachable warrants: The bond is not surrendered upon conversion, only the warrants plus cash representing the exercise price of the warrants. The warrants can be bought and sold separately from the bonds.
Term
 Types of Bonds: Participating bonds
Definition
 are bonds that not only have a stated rate of interest but participate in income if certain earnings level are obtained.
Term
 Types of Bonds: Term bonds
Definition
 are bonds that have a single fixed maturity date. The entire principal is paid at the end of this term/period.
Term
 Types of Bonds: serial bonds
Definition
 pre-numbered bonds that the issuer may call and redeem a portion by serial # (often redeemed pro rate annually in a series of annual installments.
Term
 Types of Bonds: income bonds
Definition
 are bonds that only pay interest if certain income objectives are met.
Term
 Types of Bonds: Zero Coupon bonds
Definition
 deep discount bonds are bonds sold with no stated interest but rather at a discount and redeemed at the face value without periodic interest payments.
Term
 Types of Bonds: commodity backed bonds
Definition
 asset linked bonds are bonds that are redeemed either in cash or a stated volume of commodity which ever is greater.
Term
 Bonds payable should be recorded as a
Definition
 long term liability at face value and adjusted to the present value of their future cash outflows by either subtracting un-amortized discounts or adding unamortized premiums. Bonds payable are recorded at the true present value at the date of issuance based on the market effective interest rate at that date.
Term
 Overview of bond terms
Definition
 Usually in denominations of \$1000Price is always quoted in 100's (% of par value)Indenture is a contract for purchase of bondCoupon rate = The stated interest rate on the bondBond interest (check amount) = coupon rate * face. Bonds generally pay interest semi annually in the US and annually in other countries.Principal pay off is always the full face amountPremium/discounts is the result of buyer and seller adjusting the coupon rate to the prevailing market rate of interest.
Term
 Accounting for the issuance of bonds: Bond selling price
Definition
 When a bond is issued, the price is computed as the sum of the present value of the future principal payments plus the present value of the future periodic interest payments. Both cash flows are discounted at the prevailing market rate of interest. This recorded price is the value of the bond at its current cash equivalent.
Term
 Accounting for the issuance of bonds: Bond selling price: Bond issued at Par Value
Definition
 when the stated rate on the bond is equal to the market effective interest rate on the date the bonds are issued. Coupon rate = market rate.
Term
 FV of bond equals 2 elements
Definition
 PV of the future interest payments at market rate.PV of the principal at market rate.
Term
 A bond is issued at a discount when
Definition
 the stated rate on the bond is less than the market effective interest rate on the date the bonds are issued = Low interest rate = discount.
Term
 A Bond issued at a premium when
Definition
 the stated rate on the bond is greater than the market effective interest rate on the date the bonds are issued.
Term
 Stated Interest Rate of a bond is typically
Definition
 printed on the bond and included in the bond indenture before the bond is brought to market. The stated rate of a bond will not change, regardless of the market rate at the date of issuance. The amount of cash received by a bondholder at regular interest payment intervals throughout the life of the bonds will always be at the stated rate to the face amount of the bond. Interest is typically paid on bonds twice a year (semi annually) although interest expense will accrue monthly. Coupon Rate = does not = market rate--> premium/discount.
Term
 Effective interest rate: Market rate:
Definition
 coupon rate adjusted for premium or discount - makes the effective interest rate. because the amount of cash to be received in the future is fixed at the time the bond is sold the market will automatically adjust the issue price of the bond so that the purchaser receives the market rate of interest for comparable risk bonds i.e effective interest rate. A discount or premium on the bonds will exist when the bonds are issued with a stated rate that differs from the market rate at the date of issuance.
Term
 Discount: Unamortized discount
Definition
 The unamortized discount on bonds payable is a contra account to bonds payable, which means that it is presented on the balance sheet as a direct reduction from the face par value of the bonds to arrive at the bonds carrying value at any particular point in time. When you get less you subtract.
Term
Definition
 The unamortized premium on bonds payable is presented on the balance sheet as a direct addition to the face (par) value of the bonds to arrive at the bond's carrying value at any particular point in time. Long term liabilites: Bonds payable, 10 % due = 1,000,000Add: Unamortized premium: 81,105= 1,081,105When u get more u add it to the face.
Term
 Bond issue cost are us gaap
Definition
 transaction costs of the bond issue. Examples include legal fees, accounting fees, underwriting commissions and printing. These and any other issue costs should be recorded as a deferred charge (an asset)and amortized from the date of issuance of the bonds into expense (typically interest on bonds issue expense) using the straight line method. Bond issue costs are typically paid directly by the broker and are repaid to the broker by the company through the proceeds of the bond issue, which means that the issuing company receives bond proceeds net of the bond issue cost. (assets)
Term
 Bond issue cost are (IFRS)
Definition
 Bond issue costs are not recorded as a separate asset. they are deducted from the carrying value of the liability and amortized using the effective interest method.
Term
 Methods of discount and premium amortization
Definition
 Straight line and effective interest method.
Term
 Methods of discount and premium amortization: Straight line method
Definition
 Simply divide the unamortized discount or premium by the # of periods the bonds are outstanding and amortize the same amount of discount or premium each period. This method of amortized results in a constant dollar amount of interest each period. The SL method is not GAAP but is allowed under US GAAP if the results are not materially diff from the effective interest method. interest exp is calculated as follows = Premium or discount/ # of periods bond is outstanding = Periodic amortization. Interest expense = (Face value * stated interest rate) - premium amortization or plus discount amortization. SL method is not permitted under IFRS. Check amount (face* coupon) + or - Amortization = Interest expense.
Term
 Under IFRS amortization is done over the ___________ life of the bond not the ____________ life of the bond
Definition
 expected - contractual.
Term
 The market price of a bond issued at a premium is equal to the present value of its principal amount and the
Definition
 present value of all the future interest payments, all the market effective interest rate.
Term
 Year End Bond Interest Accrual
Definition
 When the date of a scheduled interest payment and the issuers year end do not agree, it is necessary to accrue interest by adjustment entry on the issuers book at the year end. The accrual must take into acct a prorated share of discount or premium amortization.
Term
 Bond sinking funds
Definition
 To avoid a cash shortage at the time of debt repayment, a company may build up a separate cash sinking fund. A bond sinking fund is a trustee fund (restricted cash) pursuant to the indenture wherein the company contributes money each year so that at maturity there is a sum available to repay the entire liability. Classification: The sinking fund is generally a non-current (restricted) asset on the financial statements of the issuer, It is a current asset only to the extent that it offsets a current liability.
Term
 Sinking fund balance
Definition
 earns interest or dividents over time. The accumulated deposits and interest dividends thereon will be used to pay bond upon maturity. The amount accumulated from regular deposits with the trustee serve as collateral for the issued bonds.
Term
 Sinking funds: appropriation
Definition
 a bond sinking fund is merely an appropriation of Retained earnings to indicate to the shareholders that certain retained earnings are being accumulated for bond sinking fund purpose.
Term
 To determine the periodic payments to be made to the sinking funds
Definition
 the future value of an annuity of \$1 at an assumed rate must be used because the periodic deposits are earning interest.
Term
 Amortization methods on serial bonds are
Definition
 Effective interest method and bonds outstanding method: uses % of decrease in outstanding debt each maturity period as the basis for calculating the related amount of premium or discount on the bonds. The bonds outstanding method is not GAAP but it has been tested on CPA exam
Term
 Convertible bonds
Definition
 are often issued at more than face value b/c of the value of the conversion feature. Us gaap, the issue prices is allocated to the bonds with no recognition of the conversion feature because it is diff to assign a specific value to the conversion feature. everything goes to bond at issue - non detachable warrants.
Term
 Conversion book value method GAAP
Definition
 Under the BV method, no gain or loss is recognized. At conversion the bond payable and related premium or discount are written off and common stock is credited at par. APIC is credited for the excess of the bond carrying value over the stock's par value less any conversion costs. No gain and loss is recognized because the book value method views the conversion as the completion of a prior transaction (issuance of convertible debt) rather than viewing it as culmination of earnings process.upon conversion the issuer must:Pay the accrued interest up to the conversion date. Amortize the bond discount or premium to the conversion date.Amortize the bond issue costs up to the conversion daterecord diff as additional paid in capital. No I/S impact, common stock and APIC only
Term
 MArket value method - conversion
Definition
 Non Gaap but tested. The market value method views the conversion as culmination of earnings process, thereby resulting in a recognized gain or loss. At conversion,the bonds payable and related premium are written off, and common stock is credited at par. The credit to APIC is the excess of the market price of the stock over par value. The diff btw the mrkt value of the stock and the book value of the bonds is a recognized gain or loss on redemption. income statement impact.
Term
 Bonds sold with detachable stock purchase warrants
Definition
 warrants are options contracts that are issued with, and detachable from, bonds and notes. The warrant gives the bondholders the right to buy stock at a fixed price within a specific time period. Because they are detachable, the warrants are traded separately and are considered to be a separate financial instrument. Thus they are accounted for differently than convertible bonds under US GAAP.
Term
 Bonds sold with detachable stock purchase warrants: Account for separately
Definition
 a conversion feature that is separate from a security should be accounted for separately and a value should be assigned to it. The value assigned to a separate conversion feature is its relative FV at the time of issue. This amount is credited to APIC, warrants. It is imp to rem that a value is assigned to a conversion feature only if it is detachable and has its own market value. DR. Cash XXXXCR. Bonds payable XXXCR. APIC - warrants. XXXwhen issuedAt issue date allocate bond proceeds to bonds and warrant.
Term
 Detachable bond: Accounting treatment
Definition
 Bonds with detachable stock purchase warrants may be recorded at issuance using two diff methods. The warrants only method is used if only the FV of the warrants is known. The market value method ( warrants and bonds method) is used if the FV of both the warrants and bonds are known. Steps to acct for bond issued with detachable stock purchase warrants. 1. separate the warrants from the debt at the date of issuance of the bonds.2. generally, allocate the amount received upon issuance separately to debt and to be detachable warrants according to their relative FV at the date of issuance (using the market value method).a. In some cases, it is not possible to obtain the relative FV of both the debt and the warrants, but the FV of one of them can typically be determined using this is the warrants. b. in this case the warrants only method. allocate the known fair value to its related item again usually the warrants and allocated the remainder of the proceeds to the other items typically the debt. 3. the amount that is allocated to warrants is credited to an account called APIC warrants" in the shareholders equity section. 4. any difference btw the amount allocated to the bonds and the FV of the bonds should be debited or credited to discount or premium on bonds payable. 5. Exercise of the warrants:a. Cash is received by the company upon exercise of the warrant. b. On the excercise date, the following j/e is used to record the issuance of stock to the holders of the warrant. Dr. Cash XXDr. APIC - warrant XX (reverse)CR. Common stock XXCr. APIC XXexercise of detachable warrants. No bond impact.
Term
 Extinguishment of debt
Definition
 corp issuing bonds may call or retire them prior to maturity. callable bonds can be retired after certain date at a stated price. Refundable bonds allow an existing issue to be retired and replaced with a new issue at a lower interest rate.
Term
 Definition of Extinguishment
Definition
 A liability cannot be de-recognized in the financial statements until it has been extinguished. A liability is considered extinguished if either of the following conditions is met. 1. debtor pays: a liability is considered extinguished if the debtor pays the creditor and is relieved of its obligation for the liability.a. Bond Extinguishment at maturityIf a bond is paid at maturity the carrying value of the bond is equal to the face amount of the bond and no gain or loss is recorded Dr. Bonds payable XXCR. Cash XXBond Extinguished Before Maturity:if a bond is extinguished before maturity a gain or loss is generally recorded.
Term
 Gains or loss on bond Extinguishment before maturity
Definition
 Adjust items in the F/S: In any bond re acquisition, the following items must be accounted for and adjusted in the F/S. a. Bond issue costs reported as an asset under US GAAPAny related unamortized discount or premium and The dif between the bonds face value and the re acquisition proceeds.
Term
 Gain or loss on reacquisition:
Definition
 Gain or loss = Re acquisition price - Net carrying amount.
Term
 Under the book value method of exchanging convertible bonds for stock,
Definition
 the book value of the bonds is reallocated to the par value and the additional paid in capital accounts of the common stock - thus stockholders equity is increased.
Term
 The amount used to compute a gain or loss on bond retirement is the
Definition
 carrying amount of the bond and the pro rated portion of the bond issue cost * by portion retired. On June 2, YR1, tony inc. issued 500000 of 10% 15 y bonds at par. Interest is payable semiannually on june1 and dec 1. Bond issue costs were 6000. On june 2 year 6, tory retired half of the bonds at 98. What is the net amount that tory should use in computing the gain or loss on retirement of debt? 500000-4000 = 496000*.50 = 248000
Term
 Bond Sinking funds are accounted for in their own account including
Definition
 investments plus revenues less expensesBB+investment+dividend on investment+Interest revenue - administration cost = balance
Term
 Many companies and agencies extinguish or refund long term debt prior to maturity as a method of managing financial risk in this the refunding is not considered an extra ordinary event because
Definition
 it is not unusual and infrequent. The gain (retirement price less carrying amount of the old debt) will be included as part of continuing operations.
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