Class Test

Theory

1. Secured Bond
A bond backed by specific collateral (assets) that the issuer pledges; if
they default, bondholders can take the pledged assets to recover losses.
2. Mortgage Bond
A type of secured bond where the collateral is real estate (land or
buildings). If the issuer fails to pay, holders can foreclose on the property.
3. Collateral-Trust Bond
Secured by financial assets—typically stocks or bonds of other
companies—held in trust. If the issuer defaults, the trust’s assets are sold
to pay bondholders.
4. Unsecured Bond (Debenture)
No specific collateral; bondholders rely solely on the issuer’s
creditworthiness. If the issuer goes under, they stand behind secured
creditors in claims.
5. Junk Bond
A high-yield, high-risk unsecured bond rated below investment grade.
Because default risk is greater, it pays a much higher interest rate.
6. Term Bond
All the bonds in the issue mature on the same single date. You get the full
principal back in one lump sum at maturity.
7. Serial Bond
The issue is divided into slices that mature on different dates, spreading
repayment over several years (often used by schools or local
governments).
8. Callable Bond
Gives the issuer the option to redeem the bonds early—before the
scheduled maturity date—usually when interest rates fall, saving them
interest cost.
9. Convertible Bond
Can be exchanged, at the bondholder’s option, for a fixed number of
shares of the issuer’s common stock, blending debt safety with equity
upside.
 10. Commodity-Backed Bond
Redeemable at maturity for either a set quantity of a physical commodity
(e.g., barrels of oil, ounces of silver) or cash—whichever is more
valuable.
11. Deep-Discount (Zero-Coupon) Bond
Sold at a steep discount to face value, pays no periodic coupons; the
entire return comes from the difference between purchase price and par
paid at maturity.
12. Registered Bond
Issued in the investor’s name; the issuer keeps a registry of owners,
mailing interest payments (and replacement certificates) directly to them.
13. Bearer (Coupon) Bond
Not registered in anyone’s name; possession equals ownership. To collect
interest, holders detach and submit coupons; on maturity, they turn in the
whole bond.
14. Income Bond
Pays interest only if the issuer’s earnings are sufficient; if the company
isn’t profitable, no interest is owed. Principal is still returned at maturity.
15. Revenue Bond
Issued by governments or authorities (airports, toll roads, school districts)
where interest and principal are paid from a specific revenue stream (e.g.,
toll fees or tax levies), not from general funds.
what are the primary reason for the Convertible Bond
Primary Reasons for Issuing Convertible Bonds

 Lower Coupon: Pays less interest than plain debt.

 Broader Appeal: Attracts investors seeking equity upside.
 Deferred Dilution: Shares are only issued if converted.
 Balance‐Sheet Flexibility: Starts as debt, may turn into equity later.
 Investor Alignment: Bondholders benefit if the stock rises.
Troubled Debt Restructuring? What are some of the features of typical
restructuring arrangements?
When a borrower can’t keep up with payments, the lender agrees to special changes—
things they normally wouldn’t do—to help the borrower get back on track.

Common Changes in a TDR:

 Lower Interest Rate: The lender drops the rate so payments are smaller.
 Later Due Date: The payment deadline is pushed out, giving the borrower more
time.
 Debt Forgiveness: Part of the loan is written off, so the borrower owes less.
 Relaxed Rules: Any broken agreements (covenants) are waived or loosened to
avoid default.
 Swap for Equity: The lender takes shares or other ownership instead of cash.

Discuss the accounting problems associated with the capitalization of

borrowing costs.
.

1. Three interest methods mean the same project can end up with different costs and
profits depending on debt vs. equity.
2. Deciding when construction really starts and stops is a judgment call and can be
time consuming.
3. Figuring out if an asset “qualifies” for capitalization is subjective and varies
between companies.
4. Shorter‐term projects might get mixed in or out by mistake, hurting comparability.
5. Working out a weighted average rate on general borrowings is tricky when you
have many loans.
6. Matching loans to assets and tracking each one takes a lot of time and effort.
7. Calculating “what you could’ve avoided” if you hadn’t borrowed involves
hypothetical scenarios.

Distinguish between the following interest rates for bonds payable:

Yield rate; (ii) Nominal rate; in Stated rate; Market rate; and Effective
rate.
1. Nominal Rate / Stated Rate

 This is the interest rate printed on the bond certificate.

 It determines the periodic interest payments made to bondholders.

2. Market Rate

 Also known as the current market interest rate.

 It's the rate investors demand for bonds of similar risk and maturity in the current
market.

3. Yield Rate / Effective Rate

 Represents the actual return an investor earns if the bond is held until maturity.
 It accounts for the bond's purchase price, interest payments, and compounding.
 When bonds are issued at a discount or premium, the yield rate differs from the nominal
rate.

What is the difference between the stated and yield interest rates?

Stated Interest Rate (also called Nominal Rate):

 This is the rate written on the bond.
 It is used to calculate the periodic interest payments (e.g., 8% on a
$1,000 bond = $80 per year).
 It does not change after the bond is issued.

Yield Interest Rate (also called Effective Rate or Market Rate):

 This is the actual return an investor earns on the bond.
 It depends on the price paid for the bond.
o If bought at a discount, the yield is higher than the stated rate.

o If bought at a premium, the yield is lower than the stated rate.

 It reflects market conditions and compounding effects.

Identify the costs to include in initial valuation of property, plant and
equipment.

Costs to Include in Initial Valuation of Property, Plant and Equipment (PPE):

1. Purchase Price
– Includes import duties, non-refundable taxes, minus any discounts or rebates.
2. Directly Attributable Costs
– Costs to bring the asset to the location and condition for use, such as:
– Delivery and handling
– Installation and assembly
– Testing (after deducting any sale proceeds from test output)
– Professional fees (e.g., engineers, architects)
3. Dismantling and Site Restoration Costs
– If required by law or contract, these are added to the asset’s cost.

Define the following terms in accordance with IAS 36:

(i) Impairment; (ii) Recoverable amount; (iii) Value in use (iv) Cash
generating unit
(i) Impairment:
When an asset’s book value is more than what it can recover through use or
sale.
(ii) Recoverable Amount:
The higher of an asset’s fair value minus selling costs or its value in use.
(iii) Value in Use:
The present value of future cash flows from using and selling the asset.
(iv) Cash-Generating Unit (CGU):
The smallest group of assets that generates cash flows independently.
State the indicators of impairments

1. External indicators:
o Market value of the asset has dropped a lot.

o Big changes in technology, laws, or the economy.

o Increase in interest rates that lowers the asset’s value.

2. Internal indicators:
o Asset is damaged or outdated.

o Poor performance or losses from using the asset.

o Plans to stop using or dispose of the asset early.

Briefly define extinguishment of debt.

Extinguishment of debt means settling or removing a long-

term liability, like a bond or loan, from the books—either by
paying it off, exchanging it with assets or securities, or changing
its terms.
List the various ways that extinguishment of debt occurs.
The extinguishment of debt can occur in the following ways:
1. Payment of debt at maturity – Paying off the debt when it is due.
2. Early payment with cash – Settling the debt before the due date using
cash.
3. Asset or security transfer – Using non-cash assets or shares to settle the
debt.
4. Modification of terms – Changing the debt agreement, such as reducing
interest or extending the term.
What does impairment mean in accounting? Explain it with hypothetical
example
Hypothetical Example:
Suppose a company owns machinery with a carrying amount of $100,000.
Due to new technology, this machine becomes outdated and can now only
generate $60,000 through future use or sale.
✅ Since the recoverable amount ($60,000) is less than the carrying amount
($100,000), the company must recognize an impairment loss of $40,000.

What is amortization of bond discount or premium?

Amortization of bond discount or premium is the process of gradually
adjusting the difference between the bond’s face value and its issue price
over the life of the bond.

The capitalization of borrowing costs is based on three conditions:

1. Qualifying Assets: Only assets that take a significant time to be ready for
use or sale can qualify.
2. Capitalization Period: The period during which borrowing costs are
capitalized starts when:
o Expenditures are incurred.

o Activities to prepare the asset are in progress.

o Borrowing costs are being incurred.

The period ends when the asset is ready for use.

3. Amount to Capitalize:
o If the asset is financed by specific debt, the actual borrowing costs

incurred during the period are capitalized.

o If funded by general debt, a weighted average borrowing rate is

used.