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688 CHAPTER 14 LONG-TERM LIABILITIES LEARNING OBJECTIVES After studying this chapter, you should be able to: Describe the formal procedures associated with issuing long-term debt. Identify various types of bond issues. Describe the accounting valuation for bonds at date of issuance. Apply the methods of bond discount and premium amortization. Describe the accounting for the extinguishment of debt. Explain the accounting for long-term notes payable. Explain the reporting of off-balance-sheet financing arrangements. Indicate how to present and analyze long-term debt. • 8 • 7 • 6 • 5 • 4 • 3 • 2 • 1 Traditionally, investors in the stock and bond markets operate in their own separate worlds. However, in re- cent volatile markets, even quiet murmurs in the bond market have been amplified into movements (usually negative) in stock prices. At one ex- treme, these gyrations heralded the demise of a company well before the investors could sniff out the problem. The swift decline of Enron in late 2001 provided the ultimate lesson: A company with no credit is no company at all. As one analyst remarked, “You can no longer have an opin- ion on a company’s stock without having an appreciation for its credit rating.” Other energy companies, such as Calpine , NRG Energy , and AES Corp. , also felt the effect of Enron’s troubles as lenders tightened or closed down the credit supply and raised interest rates on already-high levels of debt. The result? Stock prices took a hit. Another debt feature that can impact shareholders are bond covenants, which provide bond investors various protections while at the same time constraining management. Such covenants may limit the payment of dividends or preclude the issuance of new debt. In some cases, covenants constrain the company from pursuing certain risky projects or prevent it from selling off assets. Why do companies offer these concessions? It is primarily because Your Debt Is Killing My Stock PDF Watermark Remover DEMO : Purchase from www.PDFWatermarkRemover.com to remove the watermark
689 PREVIEW OF CHAPTER 14 As our opening story indicates, investors pay considerable attention to a company’s liabilities. The stock market severely punishes companies with high debt levels and the related impact of higher interest costs on income performance. In this chapter we explain the accounting issues related to long-term debt. The content and organization of the chapter are as follows. BONDS PAYABLE LONG-TERM NOTES PAYABLE REPORTING AND ANALYZING LONG-TERM DEBT • Issuing bonds • Types and ratings • Valuation • Effective-interest method • Costs of issuing • Extinguishment • Notes issued at face value • Notes not issued at face value • Special situations • Mortgage notes payable • Off-balance-sheet financing • Presentation and analysis LONG-TERM LIABILITIES bond investors demand higher rates of return unless they are protected from the risk that the company will reward shareholders at the bondholders’ expense.
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