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