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Canada (162,165)
ACCT 352 (2)
Chapter 14

ACCT 352 - CHAPT 14 - NOTES.pdf

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ACCT 352
Ralph Cecere

ACCT 352 - CHAPT 14 - LT FINANCIAL LIABILITIES Nature of Long Term debt LT debt consists of obligations that are not payable within a year or the operating cycle of the business, whichever is longer, and will therefore require probable sacrifices of econ benefits in the future. Bonds payable, LT notes payable, pension liabilities and lease liabilities. Often these are with restrictive covenants (i.e. terms or conditions) that are meant to limit activities and protect both the lender and borrowers. The details of the indenture or agreement are the following: amount that the corporation is authorized to issued, the interest rate, the due date or dates, call provisions, property pledged as security, sinking fund requirements, working capital, dividend restrictions on incurring additional debt. If violate covenant company can go bankrupt.  Bonds: Bonds are the most common type of LT debt that companies report on their BS. Main purpose of bonds is to borrow for the LT when the amount of capital that is needed is too large for one lender to supply. A bond is created by a contract known as a bond indenture and represents a promise to pay both of the following: 1. a sum of money at a designated maturity date 2. periodic interest at a specified rate on the maturity amount (face value).  Notes payable: The difference between current notes payable and LT notes payable is the maturity date. LT notes are similar in substance to bonds as both have fixed maturity dates and carry either a stated or implicit interest rate. However, notes do not trade as easily as bonds in the organized public securities markets, and sometimes do not trade at all. More for small or unincorporated. Accounting for notes and bonds is quite similar. Like a bond, a note is valued at the present value of its future interest and principal cash flows, and any discount or premium is amortized over the life of the note, just as it is over the life of a bond.  Types of bonds:  Bonds ratings: Companies such as Moody’s Investors Service and Standard & Poor’s Corporation assess credit ratings of company bonds and preferred shares. Bonds ratings range from a quality of “Prime” to “Very speculative” AAA rating indicates a rating of “Prime”, while a B rating indicates a “very speculative” rating ACCT 352 - CHAPT 14 - LT FINANCIAL LIABILITIES Measurement and Valuation.  Bond Valuation: Determining Bond Price When a bond or note is issued, it should be recognized at the fair value adjusted by any directly attributable issue cost. When bonds are issued on an interest payment date at par (face value), no interest has accrued and there is no premium or discount. Bond face value: - PV of interest payments (at stated or coupon rate of interest) + - the PV redemption (face, par value) - both discounted at the market (yield) rate of interest at issue date. cash Face value Bond payable Face value at the period of the first semi annual payment: Bond interest expense (face value * coupon rate *1/2) Cash At the Y/E got to accrue for the next coupon payment: Bond interest expense (face value * coupon rate *1/2) Bond interest payable  Discounts and Premiums If bond sells for less than its face value the bonds sales at a discount. market rate>stated rate If bond sells for more than its face value the bond sales at a premium. Market
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