Mills Ch. 14 – Flashcards
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Callable
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Company Can Buy Back Outstanding Bonds Before Maturity
Buffers Against Declining Interest Rates
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Call Price
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Often Exceeds the Bonds Face Amount
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Bonds
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Represent a Liability to the Corporation That Issues Them
Represent an Asset to the Purchaser...
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Other Things Being Equal
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The Lower the Perceived Riskiness of the Corporation Issuing Bonds
The Higher the Price they Will Command
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For a bond issue that sells for more than the bond face amount, the effective interest rate is:
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Less than the rate stated on the face of the bond.
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A Bond Issue Will Be Priced
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By the Marketplace to Yield the Market Rate of Interest for Securities of Similar Risk and Maturity
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The Stated Rate Times the Face Equals
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The Cash Interest Paid
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The Market/Effective Rate Times the PV of the Bond Equals
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The Interest Expense Incurred
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Effective(Market) Interest Method
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Long Term Notes
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Lump Sum at Maturity
Balance is Face Amount
Balance Increases for a Discount
Balance Decreases for a Premium
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Installment Notes
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No Lump Sum at Maturity, Balance Is Zero
Recorded as a Note Payable
Do Not Record a Discount or Premium
The amount of difference b/w Interest and Cash
Is Principle Paid
Constant Payment Every Year
Cash Payments Are Larger
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LT Notes vs. Installment Notes
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Issuance of Installment Note/ Borrower
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Debit Machinery
Credit Note Payable
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Payment of Interest for Installment Note/ Borrower
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Debit Interest Expense
Debit Note Payable(Diff b/w IExpense & Cash Payment)
Credit Cash(Installment Payment)
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Borrowing Is a
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Financing Activity
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Lending is a
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Investing Activity
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Paying or Receiving Interest Is a
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Operating Activity
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Debt to Equity Ratio
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Return on Assets
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Return on Equity
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Times Interest Earned
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Early Extinguishment of Debt
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If Sales Price < Carrying Value = Gain
If Sales Price > Carrying Value = Loss
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Early Extinguishment of Debt
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Debit Bonds Payable
Debit Loss
Credit Discount on BP
Credit Cash
When a company retires debt before maturity
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Convertible Bonds
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Convert to Shares of Stock at the Option of the Holder
Recorded as Debt, Conversion Feature IS NOT Separately Recorded
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Reasons for Convertible Bonds
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Attract More Investors
To Sell Bonds at a Higher Price
Use as a Medium of Exchange in Mergers and Acquisitions
Enable Smaller Firms or Debt-Heavy Companies to Obtain Access to the Bond Market
Indirect Way to Issue Stock
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Issuance of Convertible Bonds
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Debit Cash
Credit Convertible Bonds Payable
Credit Premium on Bonds Payable
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Conversion of Convertible Bonds
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Debit Convertible Bonds Payable
Debit Premium on Bonds Payable
Credit Common Stock3+++++++++++++++++++
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Auerbach issued the bonds At a discount Because
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The effective interest rate is more than the stated rate.
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When a long-term note is given in exchange for equipment, the amount considered as paid for the machine is:
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The present value of the note payments discounted at the market rate.
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Bonds payable should be reported as a long-term liability in the balance sheet of the issuing corporation at the:
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Face amount price less any unamortized discount or plus any unamortized premium.
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Added to bonds payable
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Liberty Company issued ten-year bonds at 105 during the current year. In the year-end financial statements, the premium should be:
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Does Not Pay Interest
Issued at a Deep Discount
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Zero Coupon Bonds Are
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Issuing Bonds that were Dated Earlier
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Use Annual Rate and Fraction of Year to Calculate Interest
Add That to the Price Paid
