ACCT-Chapter 9: Long Term Liabilties

Straight-Line Method (discount or premium)

Allocates the same amount of interest expense in each period; result in the same total interest expense over the term of the bonds

face value

Amount of money the borrower agrees to repay at maturity

current liability

principal due next period

bonds are retired when

purchased/redeemed

long term liability

remaining principal outstanding

contractual interest rate (stated rate)l

typically expressed as an annual rate and typically paid semiannually; the actual amount of interest that has to be paid

amortization amount (straight-line)

bond discount or premium/# of interest payments

When bonds are issued by a company, the accounting entry typically shows an

increase in assets and an increase in liabilities

bond premium vs. bond discount

interest expense less than interest paid vs. interest expense more than interest paid

when bonds are issued at a premium

interest expense recognized will be less than interest paid

when bonds are issued at a discount

interest expense recognized will be more than interest paid

in a bond interest payments, amount of interest paid

is driven by the bond document

bond certificate is

issued/proof of investor's claim

selling price is often different than

its face value

Long-Term Debt to Equity

long term debt/total equity

carrying value < call price

loss

secured note

mortgage

carrying value=call price

no gain or loss

premium on bonds payable

premium account

issue price is determined based on

present value of future cash flows

process of finding present value

"discounting" the future cash flows

current market value

$$ to be received at bond issue Length of time until it is received Market rate of interest

What best describes the discount on bonds payable account?

A Contra Liability

Bonds/notes

Debt instruments that require borrowers to pay the lender the face value and usually to make periodic interest payments

unsecured bonds

Debt that does not have collateral is unsecured. Unsecured bonds typically are called debenture bonds

Leases

Distinction between short-term leases and lease agreements that extend beyond one year. A lease liability along with the right-of-use asset is recorded any time a lease extends beyond one year

Effective Interest Method

Interest expense equals a constant percentage of the carrying value; result in the same total interest expense over the term of the bonds

long term liabilities include

Long-term notes payable, bonds payable and capital leases; Sometimes involve notes requiring monthly installment payments (mortgage or car loan)

Market/ Yield Rate

Market rate of interest demanded by creditors. This is a function of economic factors and the creditworthiness of the borrower. It may differ from the stated rate

what are long term liabilties?

Obligations expected to be paid after one year

Amortization schedule requires installment payments

Principal + Interest

Stated/Coupon/Contract Rate

Rate of interest paid on the face (or par) value. The borrower pays the interest to the creditor each period until maturity

bond discounts

Receive less than face value at issuance; amortized and causes interest expense to be greater than the interest paid in each period; amortization increases the carrying value of bonds until maturity

bond premiums

Receive more than face value at issuance; Premium reduces the cost of borrowing; amortized and causes the amount of interest expense reported in each period to be less than the actual interest paid; amortization decreases the carrying value of bonds until maturity

secured bonds

Secured debt provides collateral (such as real estate or another asset) for the lender. If the borrower fails to make the payments required by the debt, the leader can take steps to "repossess" the collateral.

long term notes payable

Terms of note exceed one year; Fixed or adjustable interest rates; Recorded at Face Value; balance sheet

The premium on bonds payable account is shown on the balance sheet as

a contra asset

short term

bond interest payable

long term

bonds payable

carrying value for bond premiums

bonds payable + premium

carrying value for bond discounts

bonds payable-discount

steps to record interest payments

calculate interest payment calculate bond interest expense results on amortization amount

steps to record interest payments

calculate interest payments (Carrying Value * Effective Interest Rate) calculate amortization amount (Bond interest expense - Bond interest paid) result in bond interest expense (Face Value * Stated Rate)

a bond's selling price is

dictated by market value

market rate

drives issue price

maturity date

due when the face value has to be paid a bond

what is on a bond certificate

face value, maturity date, contractual interest rate, timing of interest payments

carrying value > call price

gain

timing of interest payments

semi annual or annual payment on a bond

in a bond interest payment, interest is treated

separately from the bond itself

Debt to Total Assets

total liabilities/total assets

Debt to Equity

total liabilities/total equity