CHAPTER 14 REVIEW *Note: All asterisked (*) items relate to material contained in the Appendix to the chapter. 1. Chapter 14 presents a discussion of the issues related to long-term liabilities. Long-term debt consists of probable future sacrifices of economic benefits. These sacrifices are payable in the future, normally beyond one year or operating cycle, whichever is longer. Coverage in this chapter includes bonds payable, long-term notes payable, mortgage notes payable, and issues related to extinguishment of debt. The accounting and disclosure issues related to long- term liabilities include a great deal of detail due to the potentially complicated nature of debt instruments. Long-Term Debt 2. (S.O. 1) Long-term debt consists of obligations that are not payable within the operating cycle or one year, whichever is longer. These obligations normally require a formal agreement between the parties involved that often includes certain covenants and restrictions for the protection of both lenders and borrowers. These covenants and restrictions are found in the bond indenture or note agreement, and include information related to amounts authorized to be issued, interest rates, due dates, call provisions, security for the debt, sinking fund requirements, etc. The important issues related to the long-term debt should always be disclosed in the financial statements or the notes thereto. 3. Long-term liabilities include bonds payable, mortgage notes payable, long- term notes payable, lease obligations, and pension obligations. Pension and lease obligations are discussed in later chapters. Bonds Payable 4. (S.O. 2) Bonds payable represent an obligation of the issuing corporation to pay a sum of money at a designated maturity date plus periodic interest at a specified rate on the face value. See the glossary for terms commonly used in discussing the various aspects of corporate bond issues. 5. Bonds are debt instruments of the issuing corporation used by that corporation to borrow funds from the general public or institutional investors. The use of bonds provides the issuer an opportunity to divide a large amount of long- term indebtedness among many small investing units. Bonds may be sold through an underwriter who either (a) guarantees a certain sum to the corporation and assumes the risk of sale or (b) agrees to sell the bond issue on the basis of a commission. Alternatively, a corporation may sell the bonds
directly to a large financial institution without the aid of an underwriter. 6. If an entire bond issue is not sold at one time, both the amount of the bonds authorized and the bonds issued should be disclosed on the balance sheet or in a footnote. This discloses the potential indebtedness represented by the unissued bonds.