Essay Writing
Discussion Questions
• In your opinion, how would the AICPA adoption of International Accounting Standards potentially affect how American companies value inventory? Explain.
• Why does the federal government allow for accelerated depreciation of fixed assets even when the useful life and utility of the assets clearly align more to straight-line depreciation? Explain.
• In your opinion, why are some bonds sold at a discount and others at a premium? How does this affect the accounting for the bonds?
When the terms premium and discount are used in reference to bonds, they are telling investors that the purchase price of the bond is either above or below its par value. For example, if a bond with a par value of $1,000 is selling at a premium when it can be bought for more than $1,000 and is selling at a discount when it can be bought for less than $1,000.
Bonds can be sold for more and less than their par values because of changing interest rates. Like most fixed-income securities, bonds are highly correlated to interest rates. When interest rates go up, a bond's market price will fall and vice versa.
To better explain this, let's look at an example. Imagine that the market interest rate is 3% today and you just purchased a bond paying a 5% coupon with a face value of $1,000. If interest rates go down by 1% from the time of your purchase, you will be able to sell the bond for a profit (or a premium ). This is because the bond is now paying more than the market rate (because the coupon is 5%). The spread used to be 2% (5%-3%), but it's now increased to 3% (5%-2%). This is a simplified way of looking at a bond's price, as many other factors are involved; however, it does show the general relationship between bonds and interest rates.
• What organizations are responsible for governing financial reporting? What is the role of each organization? How have the roles changed in the last 20 years? How might their roles change in the
• In your opinion, how would the AICPA adoption of International Accounting Standards potentially affect how American companies value inventory? Explain.
• Why does the federal government allow for accelerated depreciation of fixed assets even when the useful life and utility of the assets clearly align more to straight-line depreciation? Explain.
• In your opinion, why are some bonds sold at a discount and others at a premium? How does this affect the accounting for the bonds?
When the terms premium and discount are used in reference to bonds, they are telling investors that the purchase price of the bond is either above or below its par value. For example, if a bond with a par value of $1,000 is selling at a premium when it can be bought for more than $1,000 and is selling at a discount when it can be bought for less than $1,000.
Bonds can be sold for more and less than their par values because of changing interest rates. Like most fixed-income securities, bonds are highly correlated to interest rates. When interest rates go up, a bond's market price will fall and vice versa.
To better explain this, let's look at an example. Imagine that the market interest rate is 3% today and you just purchased a bond paying a 5% coupon with a face value of $1,000. If interest rates go down by 1% from the time of your purchase, you will be able to sell the bond for a profit (or a premium ). This is because the bond is now paying more than the market rate (because the coupon is 5%). The spread used to be 2% (5%-3%), but it's now increased to 3% (5%-2%). This is a simplified way of looking at a bond's price, as many other factors are involved; however, it does show the general relationship between bonds and interest rates.
• What organizations are responsible for governing financial reporting? What is the role of each organization? How have the roles changed in the last 20 years? How might their roles change in the