Chapter 10 - Financial Accounting Chapter 10 Notes Long...

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Chapter 10 Author: Anna Rovira Beavers Needles 2008 8/15/08 1 Financial Accounting Chapter 10 Notes Long Term Liabilities I. Criteria for Long Term Liabilities When companies need funds for long periods they acquire long-term liabilities. The main sources of long-term funds are: 1. Stock Issuance 2. Long Term Liabilities such as: Bonds, notes, mortgages, and leases. Some management issues in deciding the type of long-term funds to acquired are: 1. Whether or not to have long-term debt. 2. How much long-term debt to have 3. What type of long-term debt to have Long-term debt represents financial commitments that must be paid at maturity and interest or other payments that must be paid periodically. In turn common stock does not have to be paid back, and dividends are usually paid only if the company earns sufficient income. But, long-term debt may have some advantages over issuing common stock these are: 1. Companies do no lose addition control over the company. Bondholders do not have any control as stockholders do. 2. The interest on debt is tax deductible, whereas dividends of common stock are not. 3. Financial Leverage. When a company issues bond to acquire an asset which earn more with that the interest due. In-Class Exercise: SE3 II. The Nature of Bonds Bonds are the most common type of long-term debt. A bond is a security, usually long-term, representing money borrowed from the investing public by a corporation or some other entity. Its may be repaid at a specified time and requires periodic payments of interest. Interest is usually paid semiannually. III. Bond Terminology: A bond issue is the total number of bonds issued at one time. A bond indenture is a supplementary agreement defining the rights, privileges and limitation of the bondholder. IE: Maturity date, interest rate, interest payment etc. An Unsecured Bond (also called debentures) is a bond issue of the general credit of an organization. A Secured bond is a bond backed by specific asset/s of the issuing company ( like real estate).
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Chapter 10 Author: Anna Rovira Beavers Needles 2008 8/15/08 2 Term Bonds when bonds are issue to mature on the same date. Serial Bonds when bonds are issue to mature at different dates. Market Interest Rate: Rate of interest paid in the market on bonds of similar risk, also called effective interest rate Face Value of a bond: The principal, or established, interest rate of the bond. Bonds Issue at Discount:
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This note was uploaded on 03/10/2011 for the course BUS 1B taught by Professor Kite during the Spring '11 term at Laney College.

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Chapter 10 - Financial Accounting Chapter 10 Notes Long...

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