KRISTINE JEAN B.

GERUNDA

BSAC-2B

THINK AHEAD!

QUESTIONS ANSWER
Define non-current liabilities. Give 3 common Noncurrent Liabilities are long-term financial
examples of non-current liabilities. obligations that are reported on a company's
balance sheet under the names long-term
Liabilities or long-term Debts. Unlike current
liabilities, which are short-term debts with
maturity dates within the next year, these
liabilities include obligations that become due at
some point in the future that is more than a year
away.
The 3 common examples of non-current liabilities
are long-term lease obligations, deferred
revenue, and bonds payable.

What are bonds? Differentiate contract rate and Bonds are investment securities where an
effective rate of interest. investor lends money to a company or a
government for a set period of time, in exchange
for regular interest payments.
The contract rate, also called the coupon rate,
stated rate, or nominal rate is the interest
percentage listed on the face of a note or bond.
In other words, this is the interest rate that will
be paid on the principle balance for the life of
the note or bond. You can think of it as the fee
for borrowing the principal amount of money.
While, effective interest rate, also known as
annual equivalent rate, is the rate of interest that
is actually paid or earned by the person on the
financial instrument which is calculated by
considering the effect of the compounding over
the period of the time.

Why might a corporation choose to issue debt A company that needs money for its business
securities rather than equity securities to meet its operations can raise capital through either
additional long-term fund requirement? issuing equity or taking on long-term debt.
Whether it chooses debt or equity depends on
the relative cost of capital, its current debt-to-
equity ratio, and its projected cash flow.
Equity is a catch-all term for non-debt money
invested in the company, and normally
represents a shift in the composition of
ownership interests. Debt financing is generally
cheaper, but creates cash flow liabilities the
company must manage properly. We explore
both options below.

Differentiate a serial bond from a term bond A serial bond is a bond issue that is structured so
that a portion of the outstanding bonds mature
 at regular intervals until all of the bonds have
matured. While, Term bonds are notes issued by
companies to the public or investors with
scheduled maturity dates. The term of the bond
is the amount of time between bond issuance
and bond maturity. On the maturity date of a
term bond, the bond's face value, the principal
amount, must be repaid to the bondholder.
Term bonds can be contrasted with serial bonds,
which mature in installments over a period of
time.

How does a registered bond differ from a coupon Coupon bonds are railroads normally paid
or bearer bonds? interest on their loans twice a year. The accepted
procedure was for companies to attach small
coupons to bonds. Then, twice a year,
bondholders cut coupons from their certificates
and redeemed them for interest. While,
registered bonds are coupons made interest
payments simple. However, as companies grew,
they found it ever more difficult to count and
track hundreds or thousands of tiny coupons.
Companies gradually dropped coupon bonds in
favor of registered bonds. That allowed
companies to pay interest directly to their
registered bondholders.

What is a callable bond? A callable bond, also known as a redeemable

bond, is a bond that the issuer may redeem
before it reaches the stated maturity date. A
callable bond allows the issuing company to pay
off their debt early.

What are debenture bonds? Secured Bonds? A debenture is a type of bond or other debt
instrument that is unsecured by collateral. Since
debentures have no collateral backing, they must
rely on the creditworthiness and reputation of
the issuer for support. Both corporations and
governments frequently issue debentures to raise
capital or funds.
A secured bond is a type of investment in debt
that is secured by a specific asset owned by the
issuer. The asset serves as collateral for the loan.
If the issuer defaults on the bond, the title to the
asset is transferred to the bondholders. Secured
bonds may also be secured with a revenue
stream that comes from the project that the
bond issue was used to finance.

When is a bond issued at face value? At less than Bonds are issued at par or face value if the
face value? At more than face value? stated interest rate equals the prevailing rate for
similar investments at the issue date. Because
bonds can be issued on an interest date or
 between interest dates, both cases will be
discussed.
Bonds are often issued between interest dates.
When this occurs, investors pay the issuing
corporation for the interest that has accrued
since the last interest date. This is because
investors receive the entire 6 months’ interest on
the next interest payment date, regardless of
how long they have held the bonds. This
procedure has definite record-keeping
advantages for the issuer, whether or not the
bonds are registered. If the bonds are registered,
the corporation does not have to maintain
records concerning when each of the particular
bonds in the bond issue was purchased or to
compute individual partial interest payments.

What is a bond price or market price? How is a Bond price is the present discounted value of
bond price calculated, given the prevailing future cash stream generated by a bond. It refers
market rate of interest similar obligations? to the sum of the present values of all likely
coupon payments plus the present value of the
par value at maturity. To calculate the bond
price, one has to simply discount the known
future cash flows.
The formula for bond pricing is basically the
calculation of the present value of the probable
future cash flows, which comprises of the coupon
payments and the par value, which is the
redemption amount on maturity. The rate of
interest which is used to discount the future cash
flows is known as the yield to maturity (YTM.)

Bond Price = ∑i=1n C/(1+r)n + F/(1+r)n

or
Bond Price = C* (1-(1+r)-n/r ) + F/(1+r)n

What are bond issue costs? How are they treated The fees associated with issuing a bond to an
and presented in the financial statements? investor.
The accounting for these costs involves initially
capitalizing them and then charging them to
expense over the life of the bonds. Bond issue
costs may include accounting fees, commissions,
legal fees, printing costs, registration fees, and
underwriting fees.

How does amortization of premium affect the The carrying amount of the bonds is the sum of
nominal interest on the carrying amount of the their face amount and the unamortized premium.
bond? Therefore, premium amortization will reduce the
carrying amount of the bonds. Bond premium
amortization will increase income because it will
reduce the interest expense associated with the
bonds.
How does amortization of discount affect the A common factor between bond amortization
nominal interest on the carrying amount of the and indirect cash flow method is that both of
bond? them involve interest expenses which are not in
cash. In the indirect cash flow method, the
expenses not in cash are adjusted to the net
income (which is a profit in accounting that has
expenses in cash and also not in cash). With the
amortization of bonds, a discount or adjustment
is promoted.

What are detachable share warrants? Why do A detachable warrant is a derivative that is
corporation issue bonds with detachable share attached to a security, which gives the holder the
warrants? right to purchase the underlying asset at a
specific price within a certain time frame.
Investors who hold detachable warrants can sell
them while keeping the underlying security, or
sell the underlying securities while holding on to
the warrants. Because they are attached
to preferred stock, investors must sell warrants if
they want to receive dividends.

Describe the accounting entries involved in the The accounting treatment for the issuance of
issue of bonds with share warrants bonds depends on whether the bonds are issued
at par, a discount, or a premium. The bond
issuing companies will record the transactions for
the bond principal and the interest payments
separately.
Companies issue bonds to raise capital from the
market. Bonds are typically issued when
companies require funding for long-term
projects.

What are convertible bonds? Why do A convertible bond is a fixed-income corporate

corporations’ issue convertible bonds? debt security that yields interest payments, but
can be converted into a predetermined number
of common stock or equity shares. The
conversion from the bond to stock can be done at
certain times during the bond's life and is usually
at the discretion of the bondholder.
Convertible bonds are typically issued by
companies that have high expectations for
growth and less-than-stellar credit ratings. The
companies get access to money for expansion at
a lower cost than they would have to pay for
conventional bonds. Investors, in turn, get the
flexibility of turning their convertible bonds into
cash or stock shares.

What is a troubled debt restructuring? A troubled debt restructuring occurs when a

creditor grants a concession to a debtor that it
would not normally consider. A concession may
involve restructuring the terms of a debt (such as
 a reduction in the interest rate or principal due,
or an extension of the maturity date) or payment
in some form other than cash, such as an equity
interest in the debtor. A restructuring is done for
economic or legal reasons related to the debtor's
financial difficulties.

What are the different ways of restructuring a 1.Debt for Equity Swap
troubled debt? Describe each briefly - In debt to equity swap, the lenders may choose
to forgo the outstanding debt for a stake in the
company. It is usually done in cases where the
company has a large asset base and a
large balance sheet, and bankruptcy will create
little value for the lenders.
2.Bondholder Haircut
-A defaulting company with outstanding bonds
may negotiate with the bond investors and offer
payments at a discounted price, omitting or
reducing the interest payments or principal
payments.
3.Negotiating Repayment Terms
-A company may negotiate repayment terms,
including reducing the interest rate, writing off
some outstanding loans, and increasing the time
to repayment. That is a more affordable method
and can be achieved by an agreement between
the lenders and the company.

What are the possible modifications of terms in a When the debtor and creditor cannot agree on a
troubled debt restructuring? settlement, then the next step would be to
modify the terms. From an accounting
perspective, you would compare the sum of
future cash flows to the carrying value of the
debt.
Total future cash cashflows represents the
amounts of both principal and accrued interest
owed on a debt at the time of its restructuring.
This amount will be the continuation of the
payable in accordance with the new terms of the
deal.

When would a modification debt terms qualify to An exchange between an existing borrower and
be accounted for as a derecognition of the old lender of debt instruments with substantially
financial liability and recognition of a new different terms should be accounted for as an
financial liability? extinguishment of the original financial liability
and the recognition of a new financial liability.
Similarly, a substantial modification of the terms
of an existing financial liability or a part of it
should be accounted for as an extinguishment of
the original financial liability and the recognition
of a new financial liability.
THEORIES

1. B
2. A
3. C
4. B
5. D
6. C
7. D
8. C
9. D
10. A
11. D
12. C
13. D
14. A

PROBLEMS

1. D
2. B
3. A
4. A
5. C
6. B
7. 1. A
2. B
3. A
8. C
9. A
10. A
11. C
12. A
13. C
14. D
15. 1. C
2. B

SOLUTION

1. Notes Payable P 5,000,000

Accrued Interest Payable 500,000

Total Liability P 5,500,000

Total Liability P 5,500,000

CA of Land (2,000,000)

Gain on extinguishment of debt P 3,500,000

2. Notes Payable P 6,000,000

Accrued Interest Payable 600,000

Total CA P 6,600,000

FV of shares (50,000x110) (5,500,000)

Gain on extinguishment of debts P 1,100,000

3. Notes Payable P 5,000,000

Accrued Interest Payable 700,000

Total Liability P 6,600,000

Face Value (5,500,000)

Gain on debt restructuring P 1,700,000

4. PV of principal P 4,984,000

PV of annual interest payments 1,680,000

Total PV of New Liability P 6,664,000

N/P- Old P 8,000,000

Accrued Interest Payable 1,500,000

Total Old Liability P 9,500,000

PV of New Liability 6,664,000

Gain on extinguishment of debts P 2,836,000

5. Issue Price(5,000x1,000)+(5,000x110) P 5,500,000

Accrued Interest from Nov. 2016 -

March 2017 (5,000,000x12%x4/12) 200,000

Total P 5,700,000

Bond Issue Cost (100,000)

Gain on extinguishment of debts P 5,600,000

6. Bonds Payable (10,000x1,000) P 10,000,000

Premiums on Bonds Payable

 (10,600,000-10,000,000) 600,000

Total P 10,600,000

Bond issue cost (150,000)

Bonds Payable P 10,450,000

7. 1. PV of the principal= P 500,000 x 0.534 = P 267,000

2. PV of the interest= P 500,000 x 3% x 11.652= P 174,780

3. Issue price of the bonds= P 267,000 + P 174,780= P 441,780

8. Bonds Payable P 5,000,000

Issue Price (4,800,000)

Discount in BP P 200,000

Bond issue cost 107,000

Total P 307,000

Amortization (19,3000)

Discount in BP P 287,700

Interest Expense

(5,000,000 – 307,000 x 10%) 469,300

Interest Paid (5,000,000 x 9%) 450,000

Amort of discount P 19,300

Bonds Payable P 5,000,000

Discount in BP ( 287,000)

CA P 4,712,300

9. Bonds Payable P 5,000,000

Premium on BP 500,000

Total P 5,500,000

Bonds issue cost (80,000)

CA Jan.2017 P 5,420,000

Interest Paid P 400,000

 Interest Expense 325,200

Amortization of premium on BP P 74,800

Bonds Payable CA- Jan.2017 P 5,420,000

Amortization Premium 74,800

CA- Dec.2017 P 5,345,200

10. Bonds P 5,000,000

Unamortized bond discount (500,000)

Bond issue cost (300,000)

CA of Bonds P 4,200,000

CA of bonds P 4,200,000

Reacquisition Price 4,800,000

Gain on extinguishment of debts ( P 600,000)

11. Issue price w/ warrants (5,000,000 x 110%) P 5,500,000

Market value of bonds-ex warrants ( 4,800,000)

Residual Amount P 700,000

12. PV of principal P 2,850,000

PV of annual interest payments 1,980,000

Total PV of BP P 4, 830,000

Issue price w/ warrants (5,000,000 x 109%) P 5,450,000

PV of BP (4,830,000)

Residual Amount P 620,000

13. PV of principal (4,000,000 x 0.77) P 2,850,000

PV of annual interest payments (240,000 x 2.53) 607,200

Total PV of BP P 3,687,200
 Issue price w/ warrants (4,000 x 1,000) P 4,000,000

PV of BP (3,687,200)

Residual Amount P 312,800

14. Bonds Payable P 5,000,000

Premium of BP 1,000,000

CA P 6,000,000

Shoe premium conversion privileges 800,000

Total consideration P 6,800,000

Ordinary Shares (60,000 x 50) 3,000,000

Shoe Premium P 3,800,000

Conversion Expense (300,000)

Net Share Premium P 3,500,000

15. Bonds P 5,385,000

FV of bonds ( 5,100,000)

Total P 285,000

FV declined of credit risk (50,000)

Gain recognized P 235,000

Interest Expense

( 5,000,000 x 12%)= P 600,000