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Chapter Eleven Questions

Chapter Eleven Questions - Chapter Eleven Questions 1...

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Chapter Eleven Questions 1. Define the term long-term liabilities. Long-term liabilities are liabilities that do not have to be paid within one year of the date to which the balance sheet applies . For example, for the December 31, Year 1 balance sheet, long-term liabilities would be those liabilities that would not have to be paid before December 31, Year 2. 2. Give three examples of long-term liabilities. Notes payable, bonds payable, deferred taxes, obligations under capital leases. 3. What are bonds payable and notes payable? Bonds payable and notes payable are written promises to pay known dollar amounts, on specific dates, to the owners of the bonds and notes. 4. Identify one difference between bonds payable and notes payable. The common difference between bonds payable and notes payable is that notes usually have shorter lives than bonds. 5. During the life of a bond, what two dollar amounts must be paid to the bond’s owner and when are the payments usually made? A bond requires the payment of the bond principal and interest . The principal is paid at the end of the bond's life, while interest is often paid every six or twelve months. 6. State the formula for calculating interest on a bond payable. Bond interest = principal x interest rate x time. 7. On which financial statement and in which section of the statement is interest expense reported? Interest expense is reported on the income statement as part of other revenues and expenses. 8. Why do companies use underwriters when they issue bonds? Underwriters buy bonds from companies and sell them to individuals and other companies . Companies use underwriters when they issue bonds because the companies receive cash faster and they do not have to find individuals and companies to buy the bonds.
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9. Identify four choices that companies must make when they decide to issue bonds. Bond principal, life, interest rate, and interest payment dates. 10. Why can it take several weeks or months between when a company establishes a bond’s interest rate and the date that the company actually issues the bonds and receives cash? Companies must comply with rules of regulatory agencies such as the Securities and Exchange Commission . Complying with these rules takes time. 11. What are deferred taxes and why do they exist? Deferred taxes are long-term liabilities for dollar amounts owed to governments for services provided by them . Deferred taxes exist when companies report income taxes expenses on their income statements that differ from the income taxes they report on their tax returns . A common cause of deferred taxes is the use of straight-line depreciation for income statement purposes but accelerated depreciation for tax purposes.
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