Term
|
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 shot
Future value of $1 - one shot
Present value of an ordinary annuity - end of the year - series of payments
Future value of an ord. annunity - end of the year - series of payments
present value of the annuity due - beg of year - series of payments
future Va of the Annu due - beg of year- series of payments |
|
|
Term
|
Definition
Capital lease buyout at the end of lease
bond principal payoff at the end of term
US savings bond - future value as the face but present value significantly low. |
|
|
Term
|
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
|
Definition
FV = P (1 + r)Y
exp - rate 10%, P= 200000, 5
FV = 200000 (1+.10)^5
FV = 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
|
Definition
| PV=Future amount * present value factor |
|
|
Term
|
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
|
Definition
| Rental: operating lease (US GAAP/IFRS) - Sale (in substance) capital lease (us gaap) - Finance lease (IFRS) |
|
|
Term
|
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
|
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
|
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
|
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/ownership
transfers substantially all of the benefits and risks inherent in ownership of property to the lessee
This 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
| Lessee capital lease criteria (buyer) |
|
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 purchase
3. 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 facs
1. the lease transfers ownership of the asset to the lessee by the end of the lease term
2. 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 GAAP
4. 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
|
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
|
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 property
CR. 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, or
2. cost=present value of the minimum lease payments
a. include (all payments that the lessee is obligated to make)
i. required payments
ii. Bargain purchase option
when 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 value
The 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
|
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
|
|
Term
|
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 payments
1. include:
a. guaranteed residual value by lessee
b. 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 Life
Written = 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 luc
A. Recording a Sales-Type (Finance) lease
under 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 income
Gross 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
|
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% = loan
10-90% = rules
0-10% = 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 gain
basically 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 of
1. the FV of the leased property or
2. the present value of the min lease payments
owns 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 lease
1. the deferred gain loss would be recognized as an unearned profit or loss on sale leaseback
2. 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 lease
the 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 transfer
2. written bargain purchase option
then the sublease is also capital lease.
but if N or S
Ninety 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
|
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
|
Definition
| The document that describes the contract between the issuer (borrower) and bond holders (lenders) |
|
|
Term
|
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
|
Definition
| If the market rate is higher than the |
|
|
Term
|
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
|
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
|
|
Term
| Types of Bonds: Mortgage Bonds |
|
Definition
| are bonds that are secured by real propery |
|
|
Term
| Types of Bonds: Collateral Trust bonds |
|
Definition
|
|
Term
| Types of Bonds: Convertible bonds |
|
Definition
are convertible into common stock of the debtor (generally) at the option of the bondholder
Non 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
|
Definition
Usually in denominations of $1000
Price is always quoted in 100's (% of par value)
Indenture is a contract for purchase of bond
Coupon rate = The stated interest rate on the bond
Bond 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 amount
Premium/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 = 1,000,000
Add: Unamortized premium: 81,105
= 1,081,105
When 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
|
|
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
|
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
|
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
|
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 date
record 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 XXXX
CR. Bonds payable XXX
CR. APIC - warrants. XXX
when issued
At 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 XX
Dr. APIC - warrant XX (reverse)
CR. Common stock XX
Cr. APIC XX
exercise of detachable warrants.
No bond impact. |
|
|
Term
|
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 maturity
If 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 XX
CR. Cash XX
Bond 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 GAAP
Any 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 expenses
BB+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. |
|
|
