Accounting Long Term Liabilities

If there is a quote for 99 1/2 and a $1000 bond, what will the bond sell for?

$995

What are liabilities that don't meet the current liability criteria?

Bonds or notes payable

Probable future sacrifices of economic benefits may be...

Cash for accrued expenses and inventory for deferred revenue

What is the equation for a gain or loss of a bond retired before maturity?

Gain/Loss = reacquisition price - carrying value

When are liabilities considered current liabilities?

If the liability is liquidated from existing current assets or through the creation of other current liabilities and within 1 year or the operating cycle, whichever is longer

Are executory contracts accounting liabilities?

No

Are executory contracts the result of past transactions or events?

No

What is the equation for proceeds from the issuance of bonds?

Proceeds from the issuance of bonds = par value discounted at the market rate of interest + interest payments discounted at the market rate of interest

Conceptual foundation of balance sheet

Resources acquired= other peoples money + your money or assets = liabilities+ shareholders equity

Are executory contracts legal obligations?

Yes

What is the equation for yield?

Yield = Interest payment / proceeds from issuance

What does each bond holder receive?

a bond certificate

Bond

a formal debt instrument in which a borrower agrees to repay a stated amount, referred to as the par value, and interest, on specific dates to the holders

What has to be recognized if a bond is retired before maturity?

a gain or loss

What is a bond quoted for?

a percent of its par value

callable feature of a bond

allows the borrower to repay thee bonds before their scheduled maturity date at a specified call price

Convertible bonds

allows you to convert a bond into a specified number of shares of common stock

What kind of relationship is there between the yield on bonds and proceeds from issuance?

an inverse relationship

Secured bond

backed by specific assets in the event of default

Unsecured bond

backed only by general creditworthiness of issuer referred to as debentures

if bonds are retired before maturity, the amount on the books is the _______________, and the amount paid is the _________________ at the point of retirement

carrying value, market value

Executory contracts

contracts in which neither party has yet performed

What is the contract rate also called?

coupon or nominal rate

What is the equation for decrease in carrying value?

decrease in carrying value = cash payment - interest expense

for a bond issued at premium, carrying value _________ over time

decreases

when the coupon rate < market rate, the bond sells at

discount

Investors determine the amount they will lend today by _____________ the interest annuity and lump sum payments at their required rate of return

discounting

Term of a bond

entire principal due on specific single maturity date to ensure that funds are available to pay the outstanding debt as it comes due, the borrower sets aside money in a "sinking fund"

when the coupon rate = market rate, the bond sells at _________

face value

What is the par value also known as?

face value or maturity value

Are periodic bond interest payments varied or fixed?

fixed

How are cash payments on an installment note allocated interest and principal?

identify the carrying value (unpaid balance), interest expense, and decrease in carrying value

proceed less than par value __________ the coupon rate to the market rate

increase

for a bond issued at discount, carrying value _________ over time

increases

What is the equation for interest expense?

interest expense = carrying value x interest rate

What does each payment for an installment note cover?

interest for the period and a portion of the principal

What are bond prices affected by?

interest rates

installment notes

long-term notes that call for a series of installment payments

term bonds

make "interest only" payments and repay the principal at maturity

What are bonds capitalized at?

market value

What do the proceeds from the bonds equal?

market value

Where are bonds traded?

national securities exchanges

Corporation has what two sources of money?

nonowners and owners

If bonds are held to maturity, the amount on the books and the amount paid is __________

par value

Only _____________ must be repaid at maturity

par value

when the coupon rate > market rate, the bond sells at

premium

Serial of a bond

principal repaid in installments over time

Liability

probable future sacrifices of economic benefits arising from present obligations to transfer assets or provide services to other entities in the future as a result of past transactions or events

Proceed greater than par value _________ the coupon rate to the market rate

reduce

With each payment, the interest portion gets ________ and the principal portion gets _________

smaller, larger

maturity date

specified date on which principal is repaid

What are most bonds?

term bonds

Bond indenture

the contract between the company and the bond holders

issue date

the date on which the bond is issued

discount

the difference between proceeds and a higher par value

premium

the difference between proceeds and a lower par value

Under what assumption do the changes in the market value of bonds after the date of issuance get ignored?

the historical cost assumption

What is the yield on bonds?

the interest rate determined by the market

What does the bond indenture identify?

the interest rate on the bonds, interest payment dates, the principal, and the maturity date

early extinguishment of debt

the issuer retires debt of any type before its scheduled maturity date

what determines the cost of borrowing for bonds?

the market rate of interest

What does the market value of a bond issuance equal?

the present value of the amount borrowed (par value) and the cost of borrowing (interest)

par value

the principal amount that will be repaid at the maturity date(typically $1000)

what happens when the coupon rate and the market rate are the same?

the proceeds from a bond issuance equals the par value

contract rate

the state interest rate paid in cash on the principal (par value) by the issuer at specified dates until the bond matures

what are assets and bonds capitalized at?

their historical cost

capitalize

to recognize an item on the balance sheet

When are bonds retired?

when the company pays the investors the amount owed