LN- long-term liabilities (Ch 14)

LN- long-term liabilities (Ch 14) - Ch 14 Long-term...

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Ch 14: Long-term Liabilities ACCT 401, SP 11 1. Long-Term Liabilities – liabilities not expected to be paid with current assets or be replaced with other current liabilities . In other words, they are obligations whose due date is greater than one-year (or the current operating cycle) or are expected to be paid with non-current assets, other non- current liabilities, or equity. 1) Recall: current maturity of long-term debt that were to be paid with a bond-sinking fund: current liability or long-term liability? 2) Question : What are management’s incentives with respect to debt: would they rather have short-term debt or long-term debt? 2. Issuing Long-Term Debt: 1) Initial measurement : A. Long term debt is initially recorded at present value of future cash flow . B. Journal entry on the date of issuance depends on whether the long-term debt is issued at face value, or at a premium or a discount. Stated interest rate is The debt sells at Cash received JE Report on B/S: LT liabilities: < market rate Discount < face amount Dr: Cash Cr: NP or BP = market rate Face amount = face amount Dr: Cash Cr: NP or BP
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Ch 14: Long-term Liabilities ACCT 401, SP 11 > market rate Premium > face amount Dr: Cash Cr: NP or BP C. The proceeds from debt issuance show as Cash flow from ________________ on the statement of cash flows. 3. DIFFERENT TYPES OF LONG-TERM DEBT 1) “Plain-vanilla” bonds – These are plain, ordinary bonds. The bonds can be secured (e.g., backed by some sort of collateral) or unsecured. Unsecured bonds are referred to as debentures. A) Plain vanilla bonds can be issued at face value, at a premium or a discount. B) EXAMPLE 1 : Plain vanilla bonds issued when the market rate ≠ the coupon rate. Naylor Corporation, a company with a 12/31 year-end, issued ten-year, 10% bonds (payable annually) to Bank on January 1 with face value of $100,000. REQUIRED: a) If the market interest rate (i.e., effective interest rate) is 8%, what is the issue price? Prepare the journal entry to record the issuance of the bonds at 8%. 1) Issue price = PV of bond at issuance: 2) JE at issuance on 1/1 b) If the market interest rate is 12%, what is the issue price? Prepare the journal entry to record the issuance of the bonds at a 12% effective rate. 1) Issue price = PV of bond at issuance: 2) JE at issuance on 1/1
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Ch 14: Long-term Liabilities ACCT 401, SP 11 C) EXAMPLE 2 : Plain vanilla bonds with a couple of twists . On April 1, 2010, Walker Inc., a company with a 12/31 year-end, issued $700,000 of 12% (annual rate) bonds payable, dated April 1. Interest is payable semi-annually on September 30 and March 31. The bonds mature in three years. The market yield for bonds of similar risk and maturity is 10%. The entire bond issue was purchased by United Group, Inc. REQUIRED:
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This note was uploaded on 02/22/2012 for the course ACCT 401 taught by Professor Winchel during the Spring '10 term at South Carolina.

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LN- long-term liabilities (Ch 14) - Ch 14 Long-term...

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