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.
Traditionally, investors in the stock and bond markets operate in their own separate worlds.
However, in recent volatile markets, even quiet murmurs in the bond market have been
amplified into movements (usually negative) in stock prices. At one extreme, these
gyrations heralded the demise of a company well before the investors could sniff out the
The swift decline of
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 en-
ergy companies, such as
, 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.
Other industries are not immune from the negative stock price effects of credit prob-
lems. For example, analysts at
compiled a list of companies with high debt
levels and low ability to cover interest costs. Among them is
Goodyear Tire and Rubber
which reported debt six times greater than its equity. Goodyear is a classic example of how
swift and crippling a heavy debt-load can be. Not too long ago, Goodyear had a high debt
rating and was paying a good dividend. But with mounting operating losses, Goodyear’s debt
became a huge burden, its debt rating fell to junk-status, the company cut its dividend, and
its stock price dropped 80%. This was yet another example of stock prices taking a hit due
to concerns about credit quality. Thus, even if your investment tastes are in stocks, keep an
eye on the liabilities.
Adapted from Steven Vames, “Credit Quality, Stock Investing Seem to Go Hand in
Wall Street Journal
(April 1, 2002), p. R4 and Herb Greenberg, “The Hidden Dangers
(July 21, 2003), p. 153.