Lecture16 - Lecture 16 Accounting for Long Term Debt...

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Lecture 16 Accounting for Long Term Debt Issuance of Bonds
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2 Admin Stuff • Office Hours – Marshall: Wed 11-12 – Me: Wed 2:30-4:00 • Wed., July 1 st , mainly review for final exam
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3 Review PV = FV / (1+i) n NPV = Σ PV Types of long-term debt – Note: a single payment (FV) due at maturity – Mortgage: a series of equal payments throughout the length of the loan – Bond: combination of a mortgage and a note Accounting for debt – Record interest expense (a debit) – Add that to interest payable (a credit) if cash payment is not immediate – Make sure the balance sheet shows the current NPV of the debt • NPV grows bigger for a note as maturity gets closer because interest expense is accruing • NPV gets smaller for a mortgage as maturity gets closer because cash payment is bigger than interest expense and some principal gets repaid each period • Separate the current portion—any amounts due within 12 months
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4 Today • Overview of Liabilities • More on bonds – Terminology • Effective interest rate method for accounting for a bond issued at: – a premium – par – a discount
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5 Overview of Liabilities
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6 Does this definition leave some “gray areas” regarding whether certain transactions should be recorded as liabilities on the balance sheet? Why does it matter whether we reflect liabilities on the balance sheet?
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7 Contingent Liabilities Should firms have to recognize, in the balance sheet, a liability for a future payment that is uncertain?
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8 Contingent Liabilities Should firms have to recognize, in the balance sheet, a liability for a future payment that is uncertain? Potential lawsuit damages Potential environmental cleanup costs Potential warranty service costs Potential rebate redemption
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9 Contingent Liabilities Primary guidance: record liability when loss contingency is probable, estimable (and material)
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10 Contingent Liabilities Primary guidance: record liability when loss contingency is probable, estimable (and material)
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11 Contingent Liabilities Primary guidance: record liability when loss contingency is probable, estimable (and material)
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12 Accounting for Long Term Debt While the specific terms of a long-term obligation may vary substantially, an essential feature of most is that they require the borrower (debtor) to make a (contractual) series of one or more cash payments to the lender (creditor) in the future. • Note - A non-interest bearing note requires that the borrower make a single payment (to the lender) on the maturity date of the note (i.e. the date when the note agreement expires) • Mortgage - A typical mortgage note requires that the borrower make a series of equal periodic (monthly, quarterly, semi-annually, annually) payments over the term of the mortgage. • Bond
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This note was uploaded on 06/28/2009 for the course ACCT 101 taught by Professor Armstrong during the Summer '09 term at UPenn.

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Lecture16 - Lecture 16 Accounting for Long Term Debt...

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