ACC327_CH14_Notes

ACC327_CH14_Notes - 1 Chapter 14 Long-Term Liabilities 1. A...

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1 Chapter 14 Long-Term Liabilities 1. A comparison of debt and equity: Debt (e.g., issuing bonds) Equity (e.g., issuing stock) a. requires interest payments a. does not require dividend payments b. requires principal repayment b. does not require redemption c. interest is tax deductible c. dividends are not tax deductible d. does not establish ownership d. establishes ownership interests 2. Noncurrent liability - is an obligation that is not expected to require the use of existing current assets; generally, it does not mature within one year. 3. See page 691 of text for various types of bonds. 4. At what amount will bonds sell? - bonds will sell at an amount that yields the buyer the market rate of return. Stated differently, bonds will sell at the present value of future cash outflows discounted back at the market rate of interest. 5. Amortizing the discount or premium on bonds (also relates to computing interest expense) - there are two methods of amortization available, the effective interest method and the straight-line method: a. Effective interest method - interest is computed on the changing carrying value of the bonds and works as follows: Int. exp. = carrying value of bond X mkt. (or effective) int. rate Carrying value of bond = face value of bond + unamort. premium
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2 or - unamort. discount b. Straight-line method - is theoretically inferior and not recom- mended for use unless the difference between interest expense using the SL method and effective interest method is immaterial. SL method works as follows: Compute the amount of the periodic discount/premium amortization Total discount or premium = disc/prem amortization per period Number of interest payments Premium amortization reduces int. exp. below the cash paid for int. Disc. amortization increases int. exp. above the cash paid for int. 6. Bond issue costs - are the costs of preparing and issuing the bonds (e.g., brokers' commissions, legal fees, printing fees, etc.); they are accounted for as follows: a. Under current GAAP, they are considered costs that benefit future periods. As such, they are capitalized as a deferred charge (i.e., an intangible asset) and written off to expense over the life of the
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bonds. 7. Bonds sold between interest dates - require the investor to pay not only the market price for the bonds but also for any interest accrued since the last interest payment date. The preferable method of accounting for such transactions follows: a. On the date the bonds are sold, the issuing company credits interest expense for the accrued interest received. b. On the first interest payment date, the issuing company debits interest expense for the full interest period. 8. Accruing interest on bonds - when the interest payment dates do not coincide with the reporting year end (i.e., fiscal year end), interest expense and interest payable must be accrued and recognized on the books. a. A portion of any discount/premium must be amortized when this accrual
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This note was uploaded on 04/10/2011 for the course ACC 327 taught by Professor Sign during the Spring '11 term at S. Alabama.

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ACC327_CH14_Notes - 1 Chapter 14 Long-Term Liabilities 1. A...

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