CFA CFA Level 1 Question of the Week – Financial Reporting

Question of the Week – Financial Reporting

  • Author
    Posts
    • exam_whiz
      Participant
      Up
      4
      Down

      Security Solutions Corp has an outstanding bond obligation on their balance sheet with a carrying value of $275,000. The bond was issued 5 years ago, and has since lost significant value due to increasing interest rates. The company intends to re-purchase the bond for $250,000. Which of the following statements accurately portrays the transaction that will be recorded to demonstrate the redemption?

      • Under GAAP, the company will recognize $25,000 in income but will need to
        write down the costs of issuing the debt as a separate transaction.
      • Under GAAP, the company will recognize $25,000 in income and will not need
        to make an adjustment for issuance costs as they are already capitalized
        within the book value of the bond.
      • Under IFRS, the company will recognize $25,000 in income and will need to
        write down the costs of issuing the debt as a separate transaction.
    • Prosper0
      Participant
      Up
      5
      Down

      So, which is it?

    • nar_bsoa
      Participant
      Up
      4
      Down

      Think the correct answer is A since as per GAAP, the issuance costs are treated as an asset.

    • exam_whiz
      Participant
      Up
      5
      Down

      Yes A is correct.

      Under GAAP, a company will capitalize the issuance costs of debt separately from the bond itself, whereas IFRS will include it as a part of the security’s book value. As such, Security Solutions Corp will need to write-down the issuing costs separately under GAAP but does not need to do so under IFRS.

    • shannondaily
      Participant
      Up
      2
      Down

      Boo! I got it wrong. :neutral_face: 

Viewing 4 reply threads
  • You must be logged in to reply to this topic.