Chapter 14 - CHAPTER 14 LONG-TERM LIABILITIES [pages...

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CHAPTER 14 – LONG-TERM LIABILITIES [pages 671-724] LEARNING OBJECTIVES 1. Describe the formal procedures associated with issuing long-term debt. 2. Identify various types of bond issues. 3. Describe the accounting valuation for bonds at date of issuance. 4. Apply the methods of bond discount and premium amortization. 5. Describe the accounting for the extinguishment of debt. 6. Explain the accounting for long-term notes payable. 7. Explain the reporting of off-balance-sheet financing arrangements. 8. Indicate how to present and analyze long-term debt. *9. Describe the accounting for loan impairment. *10. Describe the accounting for a debt restructuring. *This material is covered in an Appendix to the chapter for your information. I. Overview – Long-term Liabilities (bonds, notes, and mortgages) A. What is long-term debt? 1. probable future sacrifices of economic benefits 2. payable in the future, normally beyond one year or operating cycle whichever is longer B. Why issue long-term debt (as opposed to equity)? 1. May be only source of funds 2. Lower cost 3. Interest payments are tax deductible 4. Creditors have no right to vote 5. takes advantage of financial leverage C. What does a long-term debt instrument look like? 1. Most contain two promises pay interest over time repay principal at maturity 2. Various rights, covenants and restrictions (to protect debtor and creditor) amount authorized face value (denomination) interest rate (and payment dates) due date (or dates) 1
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call provisions property pledged as collateral sinking fund requirements working capital and dividend restrictions limitations on the assumption of additional debt maintenance of certain debt/equity ratio D. How are bonds issued? 1. through an underwriter (investment banker or brokerage firm) “firm” underwriting (at a guaranteed price) “best efforts” underwriting (based on commission) 2. Private placement – usually to a large financial institution 3. After considerable time – SEC approval, marketing efforts E. What is Bonds Payable? 1. Represent an obligation (contract) of the issuing corporation to pay a sum of money 2. at a designated maturity date plus periodic interest 3. at a specified rate on the face value. F. What are Bonds? 1. debt instruments of the issuing corporation 2. Used by that corporation to borrow funds from the general public or institutional investors. 3. Types of bonds found in practice: a. Secured (1) Backed by a pledge or collateral (2) Mortgage bonds – real estate (3) Collateral trust bonds – stocks and bonds of other companies b. Unsecured bonds c. Term bonds- mature on a specific date d. Serial bonds-mature in installments e. Callable bonds – issuer has the right to call and retire bonds before they mature f. Commodity-Backed Bonds – redeemable in measures of a commodity g. Deep-Discount bonds – buyer gets total interest payoff at maturity 4. If an entire bond issue is not sold at one time, both the amount of the
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Chapter 14 - CHAPTER 14 LONG-TERM LIABILITIES [pages...

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