CHAPTER 10 NOTES-Accounting for Managers

CHAPTER 10 NOTES-Accounting for Managers - CHAPTER 10 NOTES...

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CHAPTER 10 NOTES BONDS: LONG-TERM LIABILITIES LONG TERM LIABILITIES ARE OBLIGATIONS THAT A COMPANY EXPECTS TO PAY MORE THAN ONE YEAR IN THE FUTURE. BONDS ARE A FORM OF INTEREST-BEARING NOTE PAYABLE ISSUES BY CORPORATIONS, UNIVERSITIES, AND GOVERNMENTAL AGENCIES. BONDS, LIKE COMMON STOCK, ARE SOLD IN SMALL DENOMINATIONS. AS A RESULT, BONDS ATRACT MANY INVESTORS. TYPES OF BONDS SECURED BONDS HAVE SPECIFIC ASSETS OF THE ISSUER PLEDGED AS COLLATERAL FOR THE BONDS UNSECURE BONES ARE ISSUED AGAINT THE GENERAL CREDIT OF THE BORROWER. 2) CONVERTIBLE AND CALLABLE BONDS CONVERTIBLE BONDS ARE BONDS THAT CAN BE CONVERTED INTO COMMON STOCKS AT THE BONDHOLDER’S OPTION. CALLABLE BONDS ARE BONDS THAT THE ISSUING COMPANY CAN RETIRE AT A STATED DOLLAR AMOUNT PRIOR TO MATURITY. CONVERTIBLE BONDS HAVE FEATURES THAT ARE ATTRACTIVE BOTH TO BONDHOLDERS AND TO THE ISSUERS. UNTIL CONVERSION THE BONDHOLDER RECEIVES INTEREST ON THE BOND. FOR THE ISSUER, THE BONDS SELL AT A HIGHER PRICE AND PAY A LOWER RATE OF INTEREST THAN COMPARABLE DEBT SECURITIES THAT DO NOT HAVE A CONVERSION OPTION. ISSUING PROCEDURES A BOND CERTIFICATE IS ISSUED TO THE INVESTOR TO PROVIDE EVIDENCE OF THE INVESTOR’S CLAIM AGAINST THE COMPANY. THE BOND CERTIFICATE PROVIDES INFORMATION SUCH AS THE NAME OF THE COMPANY THAT ISSUED THE BONDS, THE FACE VALUE OF THE BONDS, THE MATURITY DATE OF THE BONDS, AND THE CONTRACTUAL INTEREST RATE. THE FACE VALUE (AKA: PAR VALUE) IS THE AMOUNT OF PRINCIPLES DUE AT THE MATURITY DATE. THE MATURITY DATE IS THE DATE THAT THE FINAL PAYMENT IS DUE TO THE INVESTOR FROM THE ISSUING COMPANY. THE CONTRACTUAL INTEREST RATE IS THE RATE USED TO DETERMINE THE AMOUNT OF CASH INTEREST THE BORROWER
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PAYS AND THE INVESTOR RECEIVES. (USUALLY THE CONTRACTUAL RATE IS STATED AS AN ANNUAL RATE AND INTEREST IS GENERALLY PAID SEMI-ANNUALLY). DETERMINING THE MARKET VALUE OF BONDS TIME VALUE OF MONEY IS USED TO INDICATE THE RELATIONSHIP BETWEEN TIME AND MONEY-THAT A DOLLAR RECEIVED TODAY, IS WORTH MORE THAN A DOLLAR PROMISED AT SOME TIME IN THE FUTURE. PRESENT VALUE: TO DETERMINE THE VALUE TODAY OF THE AMOUNT TO BE RECEIVED IN THE FUTURE AFTER TAKING INTO ACCOUNT CURRENT INTEREST RATES. THE CURRENT MARKET VALUE (AKA: PRESENT VALUE) OF A BOND IS THEREFORE A FUNCTION OF 3 FACTORS : 1) THE DOLLAR AMOUNTS TO BE RECEIVED. 2) THE LENGTH OF TIME UNTIL THE AMOUNTS ARE RECEIVED AND 3) THE MARKET INTEREST RATE. (THE MARKET INTEREST DATE IS THE RATE INVESTORS DEMAND FOR LOANING FUNDS). THE PROCESS OF FINDING THE PRESENT VALUE IS REFERRED TO AS DISCOUNTING THE FUTURE AMOUNTS. *** EXAMPLE: ACROPOLIS COMPANY ON 1/1/10 ISSUES $100,000 OF 9% BONDS, DUE IN 5 YEARS, WITH INTEREST PAYABLE ANNNUALLY AT YEAR- END.
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This note was uploaded on 01/05/2012 for the course ACCT 6426 taught by Professor Idontknow during the Spring '11 term at FIU.

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CHAPTER 10 NOTES-Accounting for Managers - CHAPTER 10 NOTES...

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