Debt: Conceptual Issues, Long term/short term etc
Why are bonds and long term accounted for similiary?
Note is valued at its present value of future interest and cash flow.
A zero interest bearing note has not interest charged to the life of the loan. TRUE OR FALSE
FALSE. Only on the note issued a rate may not be stated but interest is still chrged over the life of the loan.
Current liabilities
have to be paid for y current assets or the creating of other current liabilities
How does a company demostrate ability to consummate refinancing?
1. Actually refinancing the short-term obligation by issuing a long-term obligation or equity securities after the date of the balance sheet but before it is issued 2. Entering into a financing agreement that clearly permits the company to refinance the debt on a long-term basis on terms that are readily determinable
what are typical examples of gain contigencies?
1. Possible receipts of monies from gifts, donations, asset sales, and so on 2. Possible refund from tax disputes form government 3. Pending court cases with a favorable outcome 4. Taxloss carry forwards
Three criteria of Liability
1. Present obligation that entails settlement by a future disbursement of cash, goods, or services 2. Unavoidable obligation 3. Transaction or other event creating the obligation has already occurred
What are the criteria for not catergorizing long term debt maturing currently as a current liability?
1. Retired by assets accumulated for this purpose that properly have not been shown as current assets 2. Refinanced or retired by a refinance 3. Convertable bonds (now current stock) Here the use of current assets or isssuance of more surrent liabilities does not occur. Creating of equity OR more long term debt Only a not to financial statements is necessary
What is a contingency?
An existing condition, situation, or set of circumstances involving uncertainty as to possible gain or to possible loss to an enterprise that will ultimately be resolved by when or more future events occuring or failing to occur.
How do you catergorize long term indebtedness that matures in the next fiscal year?
Current maturites of Long term debt
Anticipated Losses
Losses have not yet occured
What are the two requirements to be met to exclude short term obligations from current liabilities
Must intend to refinance the obligation on a long term basis AND Demonstrate ability to consummate refinancing
TRUE OR FALSE Gain contigencies are recorded by companies
NOT RECORDED only in notes if there is a high probability of it happening
What is the difference and similarities between Long term and bonds?
Similarities- Both have fixed interest rate and maturity dates Differences- Bonds more easily traded, not used by small corporations Bonds and Long term used by large corporations
Can a company make a due on demand liability long term? TRUE OR FALSE
TRUE if they can prove that it is PROBABLE they can fix the agreement within grace period
Pending transactions
The condition that would cause the loss (anticipated) has not yet occurred either
What do you do when only a portion of the debt is maturing in this year?
The portion that is is classified as a current liability and the other portion still long term
When do creditors normally call debt?
When a debt agreement is called off. Working capital and debt to equity ratio expectations
Discount on notes payable
a contra notes payable account
What is a gain contingency?
claims or rights to receive assets or reduce liabilities whose existence is uncertain but which may become valid eventually.
What is due on demand liability?
liaibilty that is callable by the creditor. ALL OF THESE KIND OF LIABILITIES SHOULD BE CLASSIFIED AS CURRENT
Operating cycle
period of time elapsed between aqcuisition of goods or services manufactured and the related cash collection from sales.
Liabilities
probable future sacrifices of economic benefits arising from present obligations of a particular entity to trnsfer assets or provide services to other entities in the future as a result of past transactions or events