Chapter 10

All of the following are current liabilities except

-Sales taxes payable -Unearned rental revenue -Current maturities of long-term debt -(All of the above)

Types of Bonds

-Secured bonds -Mortgage bonds -Unsecured bonds (debenture bonds) -Convertible bonds -Callable bonds

Bonds

A form of interest-bearing note payable issued by corporations, universities, and other governmental agencies.

Face Value

Amount of the principle due at the maturity date.

Mortgage Bonds

Bond secured by real estate.

Convertible Bonds

Bonds that can be converted into common stock and the bondholders' option.

Callable Bonds

Bonds the the issuing company can redeem (buy back) at a stated dollar amount prior to maturity.

What is the advantage of issuing 30-year debt over 5-year debt for corporations in a low interest rate environment?

Corporations can lock in a lower rate for a longer period without having to rollover their debt every five years at potentially higher rates.

Maturity Date

Date that the final payment is due to the investor from the issuing company.

Discount on Bonds Payable

Has a debit balance, but is not an asset. It is a contractual account.

Secured Bonds

Have specific assets of the issuer pledges collateral for the bonds.

Howard Corporation issued a 20-year mortgage note payable on January 1. On December 31, the unpaid principle balance will be reported as

Howard Corporation reports the reduction in principle for the next year as a current liability, and it classifies the remaining unpaid principal balance as a long-term liability. A: part current and part long-term liability.

If the company issues a $100,000, 12%, 10-year bond, that pays interest semiannually when market interest rate is 10%, the bond would sell at an amount

If the market rate of interest is lower than the contractual rate of interest, investor's will have to pay more than face value for the bonds. In these cases, bonds will sell at a premium. A: greater than face value.

Issuing Bonds

In authorizing bond issue, the board of directors must stipulate the number of bonds to be authorized, total face value and contractual interest rate.

Current Liability

Interest payable is considered a current liability.

Unsecured Bonds (Debenture Bonds)

Issued against the general credit of the borrower.

Assume that Remington Inc. sold bonds with a face value of $100,000 for $104,000. Was the market interest rate equal to, less than, or greater than the bonds' contractual interest rate?

Market interest rate is LESS THAN the contractual rate. Investors are required to pay more than the face value; therefore, the market interest rate is less than the contractual rate.

Long-Term Liabilities

Paying back more than 1 year of the operating cycle.

Bond Certificates

Provides name of the issuer, face value, contractual interest rate, and maturity date.

Contractual Interest Rate (Stated Rate)

Rate applied to the face (par) value to arrive at the interest paid in a year. Rate used to determine the amount of cash interest the issuing company pays and the investor receives.

Market Interest Rate

Rate investors demand for loaning funds to the corporation

Bond Indenture

Terms of the bond are set forth in this legal document.

Amortizing the Discount

To follow the expense recognition principle companies allocate bond discount to expense in each period in which the bonds are outstanding.

T/F Under IFRS, companies will sometimes net current liabilities against current assets to show working capital on the face of the statement of financial position.

True

Which of the following contingent liabilities should be accrued and recorded in financial statements?

Warranty expenses.

When a company retires bonds before maturity, the gain or loss on redemption is the difference between the cash paid and the

carrying value of the bonds.

The major disadvantages resulting from the use of bonds are that

interest must be paid and the principal must be repaid.

When a company's bonds are in great demand and their prices go up, this means that the borrower

is paying a lower financing rate.

The market price of a bond is the

present value of its principal amount at maturity plus the present value of all future interest payments.

"Green bonds" is a name given to a class of bonds

whose proceeds are used to fund environmentally sustainable activities.