Financial Instruments and Liabilities - Chapter 12

A review of key concepts related to financial instruments and liabilities, focusing on definitions, accounting methods, and the implications of different types of debt.

What are monetary liabilities?

Obligations that are payable in cash.

What defines a non-monetary liability?

Liabilities that are satisfied by providing goods or services instead of cash.

How are current liabilities reported on the balance sheet?

At their undiscounted amount due.

What happens to noncurrent monetary liabilities when incurred?

They are recorded at their present value.

What is a bond in financial terms?

A financial instrument representing a promise to repay borrowed amounts plus interest.

What is the principal amount of a bond?

The amount that the company will repay to the lender at maturity, also known as face value.

When are bonds said to be issued at a premium?

When the market interest rate is lower than the stated interest rate of the bond.

How does the effective interest rate differ from the stated interest rate?

Effective interest rate considers the current market yield, while stated interest rate is fixed on the bond's issuance.

What is the impact of issuing bonds at a discount?

The issuer receives less than the face value, compensating investors with a higher return.

What does imputed interest refer to?

Interest that must be recognized on noninterest-bearing debt by imputing a rate of interest.

How is debt extinguishment gain or loss calculated?

By determining the difference between the carrying value and the market value at retirement.

What are the financial implications of a debt-for-debt swap?

It can generate accounting gains despite lack of real economic substance.

How does a floating-rate debt protect lenders?

It adjusts the interest payments in response to changes in market interest rates.

What information do debt disclosures provide?

They offer details about interest rates, principal amounts, and maturity dates of long-term debt.

How do IFRS and U.S. GAAP compare in accounting for debt?

Both are similar; however, IFRS has more restrictions on fair value options.