Famba6e Sm Mod07 031914
Module 7
Reporting and Analyzing Nonowner Financing
DISCUSSION QUESTIONS
Q7-1. Current liabilities are obligations that require payment within the coming year or operating cycle, whichever is longer.
Generally, current liabilities are settled with existing current assets or operating cash flows.
Q7-2. An accrual is the recognition of an event in the financial statements even though no related external transaction has occurred. Accruals can involve both liabilities (and expenses) and assets (and revenues).
Accruals are vital to the fair presentation of the financial condition of a company as they impact both the recognition of revenue and the matching of expenses.
Q7-3. The coupon rate is the rate specified on the face of the bond. It is used to compute the amount of cash interest paid to the bondholder. The market rate is the rate of return expected by investors who purchase the bonds. The market rate determines the market price of the bond. It incorporates the current risk-free rate, expectations about the relative riskiness of the borrower, and the rate of inflation. In general, there is an inverse relation between the bond’s market rate and the bond’s market price.
Q7-4. Bonds are reported at historical cost, that is, the face amount plus (minus) unamortized premium (discount). The market price of the bonds varies inversely with the prevailing interest rates, which fluctuate continuously. Differences between the market price of a bond and its carrying amount (net book value) represent unrealized gains and losses. These unrealized gains (losses) are not reflected in the financial statements (although they are disclosed in the footnotes). They must be recognized if the issuer repurchases the bonds because at that point the gains or losses become “realized.”
Gains and losses from bond redemptions typically arise during refinancing in which new bonds are issued to retire existing bonds. The resulting gains or losses are not real economic gains and
Reporting and Analyzing Nonowner Financing
DISCUSSION QUESTIONS
Q7-1. Current liabilities are obligations that require payment within the coming year or operating cycle, whichever is longer.
Generally, current liabilities are settled with existing current assets or operating cash flows.
Q7-2. An accrual is the recognition of an event in the financial statements even though no related external transaction has occurred. Accruals can involve both liabilities (and expenses) and assets (and revenues).
Accruals are vital to the fair presentation of the financial condition of a company as they impact both the recognition of revenue and the matching of expenses.
Q7-3. The coupon rate is the rate specified on the face of the bond. It is used to compute the amount of cash interest paid to the bondholder. The market rate is the rate of return expected by investors who purchase the bonds. The market rate determines the market price of the bond. It incorporates the current risk-free rate, expectations about the relative riskiness of the borrower, and the rate of inflation. In general, there is an inverse relation between the bond’s market rate and the bond’s market price.
Q7-4. Bonds are reported at historical cost, that is, the face amount plus (minus) unamortized premium (discount). The market price of the bonds varies inversely with the prevailing interest rates, which fluctuate continuously. Differences between the market price of a bond and its carrying amount (net book value) represent unrealized gains and losses. These unrealized gains (losses) are not reflected in the financial statements (although they are disclosed in the footnotes). They must be recognized if the issuer repurchases the bonds because at that point the gains or losses become “realized.”
Gains and losses from bond redemptions typically arise during refinancing in which new bonds are issued to retire existing bonds. The resulting gains or losses are not real economic gains and