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Session 10 (3) - Session10: HyeSunChang ACCY303...

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Session 10: Financial Liabilities Hye Sun Chang ACCY 303  
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Learning Objectives Learning Objectives 1. Describe the effect of the fair value  option under SFAS 159 on accounting  for bonds. 2. Discuss early extinguishment of debt,  convertible bonds, and bonds with  detachable warrants.
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Fair Value Option under SFAS  Fair Value Option under SFAS  159 159 Companies are not required, but have the  option  to, value  some or all of their financial assets and liabilities at fair  value. When bonds are issued, the issuer has a choice – report  this liability: a) at its amortized initial measurement throughout the terms to  maturity; or  b) at its current fair value on each reporting date. If the issuer chooses the fair value option, then it must  report changes in fair value in the income statement. Market interest rate changes, so the fair value of bonds  changes. 
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Fair Value Option: Fair Value Option: Bonds Sold at a Premium Bonds Sold at a Premium On 1/1/09, Matrix, Inc. issues 1,000  On 1/1/09, Matrix, Inc. issues 1,000  bonds to Apex, Inc.  The market  bonds to Apex, Inc.  The market  interest rate is interest rate is 8%.   The bonds  The bonds  have the following terms: have the following terms: Face Value = $1,000 Maturity Date = 12/31/13 (5 years)  Stated Interest Rate = 10% Interest Dates = 6/30 & 12/31 Bond Date = 1/1/09 On 1/1/09, Matrix, Inc. issues 1,000  bonds to Apex, Inc.  The market  bonds to Apex, Inc.  The market  interest rate is interest rate is  8% .   The bonds  The bonds  have the following terms: have the following terms: Face Value = $1,000 Maturity Date = 12/31/13 (5 years)  Stated Interest Rate =  10% Interest Dates = 6/30 & 12/31 Bond Date = 1/1/09 Period Cash Interest Effective Interest Decrease in Balance Outstanding Balance 1/1/09 1,081,105 $ 6/30/09 50,000 $ 43,244 6,756 1,074,349 12/31/09 50,000 42,974 7,026 1,067,323 6/30/10 50,000
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