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
