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RCJ4Ch11N12 - Liabilities&Lease Revsine/Collins/Johnson...

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Financial Instruments as  Liabilities & Lease Revsine/Collins/Johnson: Chapter 11 &12
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RCJ S11 2 Motivational Questions 1. There is no discount when a non-interest-bearing note is issued solely for cash 2. The premium or discount amortization for each interest period is equal to the difference between the cash interest paid calculated at the stated rate and the interest expense calculated at the effective rate. 3. Debt issue costs may be deferred and amortized to expense over the period of time from the issue date to the maturity date. 4. The issuer should record periodic discount amortization as an increase in the book value of notes payable. 5. A lease generally must be noncancelable in order to be classified and accounted for as a capital lease.
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RCJ S11 3 Motivational Questions 6. Any portion of the minimum lease payments that represents executory costs to be paid by the lessor should be excluded from the computation of the recorded value of leased property, because these amounts do not represent payments for property rights. 7. The lessor should report the leased property as an asset when the lease is an operating lease. 8. After the date of lease agreement, a sales-type lease is accounted for the same as a direct financing lease.
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RCJ S11 4 Learning objectives 1. How to compute a bond’s issue price. 2. How to construct an amortization table and use it. 3. Why and how bond interest and net carrying value change. 4. How and when floating-rate debt protects lenders. 5. How debt extinguishment gains and losses arise, and what they mean. 6. How to find the future cash payments for a company’s debt. 7. Why statement readers need to be aware of off-balance sheet financing and loss contingencies. 8. How futures, swaps, and options contracts are used to hedge financial risk. 9. When hedge accounting can be used, and how it reduces earnings volatility.
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RCJ S11 5 Overview of liabilities The FASB says: This means a financial statement liability is: 1. An existing obligation arising from past events, which calls for 2. Payment of cash, delivery of goods, or provision of services to some other entity at some future date . Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or to provide services to other entities in the future as a result of past transactions or events. Not all economic liabilities qualify as financial statement liabilities Monetary liabilities Non-monetary liabilities • Payable in fixed amount of future cash • Satisfied by delivering goods or services
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RCJ S11 6 Overview of liabilities: Balance sheet illustration Total long-term debt Non-monetary liability Obligations due within one year or within operating cycle, whichever is longer
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RCJ S11 7 Types of Bonds Three annual payments methods Typical bond terms: Annual interest payment at the end of each year and repayment of principal at the end of the final year Zero-coupon bond: A single payment (of principal and interest) at the end of the final year.
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