Long-Term Debt (Bonds & Notes)

Pricing

• Price = present value of face + present value of coupons at the market rate.
• Coupon < market → discount; coupon > market → premium.

Effective interest method

• Interest expense = carrying amount × market rate. Cash = face × coupon.
• Discount: carrying amount and expense rise. Premium: both fall.
• Issuance costs: deduct from the debt's carrying amount.

Retirement

Gain/loss = net carrying amount − reacquisition price (call price × face).

Troubled debt restructuring (debtor)

• Asset transfer: remeasure asset (gain/loss) + restructuring gain = debt − fair value of asset.
• Modification: gain only if undiscounted future payments < carrying amount.

Equity features

• Detachable warrants → allocate by relative fair values; warrants to additional paid-in capital (APIC).
• Convertible bonds: whole instrument is debt; conversion at book value, no gain or loss.

Exam traps

• Bonds sold between interest dates: the buyer also pays accrued interest, which is returned at the next interest date — it isn't part of the issue price.
• Gains and losses on early extinguishment sit in continuing operations; they are no longer extraordinary items.
• Zero-coupon bonds are issued at a deep discount; all of their interest expense comes from discount amortization.
• Accounting Standards Update (ASU) 2022-02 removed the creditor's troubled debt restructuring rules; the debtor rules above still apply.