ch 14 Longliabilities

ch 14 Longliabilities - CH. 14 LONG-TERM LIABILITIES. I....

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1 CH. 14 LONG-TERM LIABILITIES. I. Nature Of Long-Term Liabilities. - Consists of present obligations not payable within one operating cycle or one year, whichever is longer. - Long-term creditors do not have voting right in management affairs and only receive a stated rate of interest regardless of the level of income. - Covenants or restrictions on the borrower for the protection of the lender are stated in the bond indenture or note agreement. - Due to their long-term nature, long-term liabilities are stated at the present value. II. Bond Payable. 1. Valuation Of Bonds At Issuance. for an example, UMES issued $100,000 of 8% term bonds on 1-1-2000, due on 12-31-2009, with interests payable annually on 12/31. The effective interest rate is 12%. present value of $100,000 due in 10 years ( 100,000 * .32197 = 32,197) 32,197 present value of interest payments ( 100,000 * 0.08 * 5.65022 = 45,201.76) 45,201.76 Value of the bonds 77,398.76 discount on b/p = the face value – value of the bond = 100,000 –77,398.76 = 22,601.24 Cash 77,398.76 Discount on Bond Payable 22,601.24 Bond Payable (B/P) 100,000 2. Amortization Of Discount Or Premium On Bond Payable.
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2 1) The effective interest method: - Interest expense = effective interest rate * carrying value of bonds at the beginning of the period. - Carrying value of bonds = face value + premium unamortized (or - discount unamortized). - Interest payable = stated interest rate * face value. - Difference between interest expense and interest payable is the discount or premium amortization. Amortization of premium should be debited, while amortization of discount should be credited. Journal entries for the bonds issued by UMES on 1/1/2000 using the effective interest method. On 12/31/2000
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ch 14 Longliabilities - CH. 14 LONG-TERM LIABILITIES. I....

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