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NBJ11e_IM_ch14 - 14 LONG-TERM LIABILITIES AND RECEIVABLES...

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14-1 14 LONG-TERM LIABILITIES AND RECEIVABLES CHAPTER OBJECTIVES After careful study of this chapter, students will be able to: 1. Explain the reasons for issuing long-term liabilities. 2. Understand the characteristics of bonds payable. 3. Record the issuance of bonds. 4. Amortize discounts and premiums using the straight-line method. 5. Compute the selling price of bonds. 6. Amortize discounts and premiums using the effective interest method. 7. Explain extinguishment of liabilities. 8. Understand bonds with equity characteristics. 9. Account for long-term notes payable. 10. Understand the disclosure of long-term liabilities. 11. Account for long-term notes receivable, including impairment of a loan. 12. Understand troubled debt restructurings (Appendix). 13. Account for serial bonds (Appendix).
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14-2 SYNOPSIS Bonds Payable 1. Long-term liabilities are one of the choices available to corporations to obtain financial resources. Companies prefer to issue debt rather than other types of securities for four basic reasons: (a) Debt financing may be the only available source of funds if the company is too risky to attract equity investments; (b) Debt financing may have a lower cost because of the lesser risk associated with debt investments; (c) Debt financing offers an income tax advantage because the interest payments to debt holders are a tax deductible expense; (d) the voting privilege of stockholders is not shared with debt holders; and (e) debt financing offers the opportunity for leverage. 2. Leverage (trading on the equity) refers to a company's use of borrowed funds to increase the return to stockholders. When a company invests borrowed funds, any excess of earnings over the interest to be paid to the debt holders increases the earnings per share of the stockholders. 3. (a) A bond is a type of note in which a company (the issuer ) agrees to pay the holder (the lender ) the face value at the maturity date and usually to pay periodic interest at a specified rate (the contract rate ). (b) The face (par) value is the amount the issuer agrees to pay at maturity. The face value of a corporate bond is generally $1,000. (c) The contract rate (stated , face , or nominal rate) is the annual rate at which the issuer agrees to pay periodic interest until maturity. (d) A bond certificate is a legal document which specifies the face value, the annual interest rate, the maturity date, and other characteristics of the bond issue. (e) The bond indenture is the contract between the issuing company and the bondholders which defines the rights of the bondholders. Included in the indenture are the characteristics of the bonds in the bond issue as well as any restrictions on the company's financial operations. 4. Companies may issue several types of bonds with different characteristics, such as: (a) debenture bonds which are not secured by specific property; (b) mortgage bonds which are secured by a lien against specific property of the company; (c) registered bonds which require registration of ownership with the company and notification to the company in the
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