chapter 14 - CHAPTER 14 LONG-TERM LIABILITIES Nature of...

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Sheet1 Page 1 CHAPTER 14 LONG-TERM LIABILITIES Nature of long-term liabilities * Present obligation - not payable within the operating cycle/year * L-T creditors - do not vote in mgt affairs - receive only interest, regardless of level of earnings * Covenants or restrictions - stated in the bond indenture or note agreement BONDS * Different types - term, serial, secured, unsecured, convertible coupon, etc * Represents - 2 promises o To pay the face value (principal) back upon maturity of the bond o To pay the stated (coupon) rate of interest on the face value throughout the life of the bond * Selling price - depends on the effective (market) rate of interest o if market rate = stated rate, bond sells at face value (par) o if market rate > stated rate, bond sells at discount o if market rate < stated rate, bond sells at premium * Calculating the selling price o PV of lump sum repayment of principal, plus
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Sheet1 Page 2 o PV of annuity payments - interest payment received over the life of the bond Note: usually the selling price is expressed as a percentage of the face value. ex: a $100,000 bond sold at 98 means that it so Bond Issuance * Bond issued at Face Value o dr. Cash, cr. Bonds Payable for the face amount of the bond * Bond issued at a Discount o dr. Cash for proceeds received o dr. Discount for the difference o cr. Bonds Payable for the face value of bond * Bond issued at a Premium o dr. Cash for proceeds received o cr. Bond Premium for difference o cr. Bonds Payable for the face value of the bond
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This note was uploaded on 01/08/2010 for the course ACC 551 taught by Professor None during the Spring '09 term at Ill. Chicago.

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chapter 14 - CHAPTER 14 LONG-TERM LIABILITIES Nature of...

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