ac101_ch10 - Revised September 2007 ACC101 CHAPTER 10...

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Revised September 2007 1 ACC101 – CHAPTER 10 Accounting for Long-Term Liabilities
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Revised September 2007 2 Key Terms and Concepts to Know Present Value: There is an old saying that time is money. Applied to accounting, it means that a dollar today is worth more to an investor or company than a dollar to be received in the future. The sooner the dollar is received, the longer it can be invested and used to generate more dollars. Therefore in order to properly compare a series of cash inflows and outflows occurring in various years, present value must be used to restate all of the cash inflows and outflows in current period dollars. Present value is based on compound interest, that is, current period interest is based on the principal amount plus the interest for all prior periods. Future cash flows are discounted back to the year when the bond was issued. The term discounting is appropriate because the future cash flows are worth less than their full amount today because we had to wait to receive them. Certain future cash flows may be annuities if they consist of equal amounts received of paid with equal frequency. Annuities are discounted using the Present value of an Annuity of $1 table. All other future cash flows are considered single payment cash flows. Single payments are discounted using the Present Value of $1 table. Bonds: Bonds are a medium to long-term financing alternative to issuing stock. Bonds are issued or sold face amount or par, at a discount if they pay less than the current market rate of interest, or a premium if they pay more that the current market interest rate. Bonds typically pay interest twice a year, i.e., semi-annually. The price of a bond is stated as a percent of face value, although the percent sign is not used. Therefore a $1,000 bond selling at 101 is selling at 101% of face value or $1,010. The “extra” $10 received when the bond is issued or sold represents the premium. Required journal entries include a. issuing the bond at par, discount or premium b. calculating and recording the bond interest payments c. calculating and recording amortization of the discount or premium d. retiring the bonds at maturity e. retiring the bonds prior to maturity and calculating the gain or loss on retirement Be able to calculate the interest expense for the year including the amortization of the premium or discount Notes: Installment notes are loans that are repaid in a series of equal payments over a number of years.
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Revised September 2007 3 The payment amounts generally remain constant, with each successive payment made up of a decreasing amount going toward interest expense and an increasing amount going toward principal repayment.
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This note was uploaded on 06/01/2011 for the course ACCOUNTING 101 taught by Professor All during the Spring '11 term at Harper.

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ac101_ch10 - Revised September 2007 ACC101 CHAPTER 10...

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