Chapter 14 Exam Study Guide ACC 302
Chapter 14 Exam Study Guide ACC 302 Acc 302
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This 3 page Study Guide was uploaded by Nicole Nord on Saturday September 19, 2015. The Study Guide belongs to Acc 302 at Ball State University taught by James Schmutte in Fall 2015. Since its upload, it has received 192 views. For similar materials see Intermediate Accounting 2 in Accounting at Ball State University.
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Date Created: 09/19/15
Accounting 302 Chapter 14 Study Guide 1 Vocabulary 1 10 11 12 Longterm debt consists of probable future sacrifices of economic benefits arising from present obligations that are not payable within a year or the operation cycle of the company whichever is longer pg764 Bond indenture What a bond arises from this kind of contract p764 Stated rate also known as nominal or coupon rate the interest rate written in the terms of the bond The issuer of the bond sets this rate p766 Face value the value of a bond at its maturity rate p766 Discount when a bond sells for less than face value it is said to sell at a discount a This happens when the market rate of interest is higher than the stated rate of the bond 767 Premium when a bond sells for more than face value it is said to sell at a premium a This happens when the market rate of interest is lower than the stated rate of the bond 767 Straight line depreciation Amortizes a constant amount each interest period a Book Example Amortizing a bond discount over a 20 year period Discount 24000 The amortization every year would be 1200 2400020 b Amortization of a discount increases interest expense Amortization of a premium decreases interest expense Fair value option Noncurrent liabilities such as bonds and notes payable are recorded at fair value with unrealized holding gains or losses reported as a part of net income 782 Unrealized holding gain or loss the net change in the fair value of the liability from one period to another exclusive of interest expense recognized but not recorded 782 Imputation The process of interest rate approximation and the resulting interest rate is called an imputed interest rate P 770 Long term notes payable a note payable that cannot be paid using current assets ie in one year Refunding the replacement of an existing issuance with a new one p776 How to use the nancial calculator This is a quick guide on how to use the financial calculator to do time value of money computations The example I am using is from page 777 of our textbook We have a 8 year note payable with a face value of 1000 a present value 325 Meaning the note sold for a deep discount The question is asking us to calculate the interest rate on this not payable Below are the imputs DISCLAIMER I AM NOT AN INSTURCTOR THIS MATERIAL IS PURELY FOR USE AS A STUDY AID NOT FOR INSTRUCTION N 8 IY PV 327 PMT 0 FV 1000 To put the above numbers in your nancial calculator you type the number and then the symbol for example N the number of periods you type 8 and press the N button Once you have done the for every item you then press CPT located on the upper left hand corner and then IY Once you have done this you will get that the interest rate is 15 Important Facts Types of bonds 1 Secured bonds bonds that are backed by a pledge of some sort of collateral Mortgage bonds are secured by a claim in real estate Collateral trust bonds are secured by stocks and bonds of other corporations 2 Unsecured bonds Bonds not backed by collateral A debenture bond is unsecured A junk bond is unsecured and also very risky and therefore pays a high interest rate Term bonds Bonds the issue matures on one single maturity date Serial bonds issues that mature in instalments Callable bonds give the issuer the right to call and redeem the bonds prior to maturity 991 93 Convertible bonds Bonds that are convertible into other securities of the corporation for a specified time after issuance 7 Commoditybacked bonds are redeemable in measures of a commodity such as barrels of oil tons of coal or ounces of rare metal 8 DeepDiscount bonds bonds sold at a discount that provides the buyers total interest payoff at maturity 9 Income bond Pay no interest unless the issuing company is pro table 10 Revenue bonds the interest on revenue bonds re paid from specific revenue sources Bond pricing The price at which bonds sell is typically stated as a percentage of the face value or par value of the bonds For example a 10000 bond that sells for 102000 is said to sell at 102 or 102 of par value This bond sold at a premium If this same 100000 bond sold at 926 then the price would be 92600 This would mean the bond sold at a discount How I got 92600 1000000926 DISCLAIMER I AM NOT AN INSTURCTOR THIS MATERIAL IS PURELY FOR USE AS A STUDY AID NOT FOR INSTRUCTION Effective interest method 1 Compute Bond interest expense first by multiplying the carrying value book value of the beginning of the period by the effective interest rate 2 Determine the discount or premium amortization by comparing the bond interest expense With the interest cash to be paid Example P 802 147 Effective rate 12 Stated Rate 10 Year Cash Paid Interest expense Discount Carrying Face Value Carrying Amortized Amount of Stated Rate Value Effective Bonds Rate 0 1855816 1 200000 222697 92 22697 92 187851392 1855816012 20000000 10 Helpful homework problems gtxlt 22269792200000 E144 E145 E147 E1410 E1412 E1413 E1416 E1420 E1421 E1422 E1424 Solution manuals are provided on the blackboard site under course content DISCLAIMER I AM NOT AN INSTURCTOR THIS MATERIAL IS PURELY FOR USE AS A STUDY AID NOT FOR INSTRUCTION
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