BUS 251 Chapter Notes - Chapter 10: Private Placement, Debenture, Deferred Income

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Ch. 10 – Long-Term Liabilities
LONG-TERM LIABILITIES ARISING FROM TRANSACTIONS W/ LENDERS
- mortgage = LT debt w/ land/building/piece of equip pledged as collateral
- financing agreement
 company & lender enter into at time of borrowing
 specifies terms of loan (i.e. interest rate, payment dates, length, etc)
- most LT loans installment loans = loan principal repayments made periodically rather than at end
 periodic repayments usu blended payments (consist of both interest & principal
components)
- 2 basic transactions related to these debts
1) initial borrowing
2) periodic loan payment
- covenant = conditions/restrictions that borrower must meet during load period
 can be financial/non-financial
- bonds can be sold thru public offering/private placement
 public offering = open to all interested investors, indiv/institutional
 private placement = open only to specific institutional investors who have agreed to purchase
bonds in advance (incl. banks, insurance companies, pension funds)
 provide stable rates of return
- bond = formal agreement b/t borrower & lender that specifies how the borrower is to pay back lender,
as well as any conditions borrower must meet while bond outstanding
- indenture agreement = bond’s terms, conditions, restrictions, covenants
- debenture = bond that carries no specific collateral but it backed by company’s general creditworthiness
 senior vs. subordinated
 diff: in event of bankruptcy, senior paid before subordinated
LONG-TERM LIABILITIES ARISING FROM TRANSACTIONS W/ OTHER CREDITORS
- finance leases = risks & rewards of ownership of leased asset transferred from lessor to lessee
 lessee purchased leased asset, w/ lessor providing financing
 record as PPE but also financing liability
 need to depreciate asset
- operating leases = default, if the lease doesn’t fit any criteria above
 lessee records each lease payment as rent expense
 companies like operating leases b/c keeps lease obligations off SFP (off-balance sheet financing
LONG-TERM LIABILITIES ARISING FROM DIFFERENCES BETWEEN ACCOUNTING STANDARDS &
INCOME TAX ACT
- deferred income taxes = accounting recognition of situations where company’s income taxes will be
higher/lower in future as a result of differences b/t accounting standards & the Income Tax Act
 differences temporary, will offset over time
- Income Tax Act prescribes capital cost allowance (CCA) rates which must be used instead of accounting
depreciation when determining net income for tax purposes
COMMITMENTS & CONTINGENCIES
- mutually unexecuted contracts = related to future transactions b/c neither party has done anything
beyond entering into contract
 no liability recorded in relation to them
- info regarding material future contracts presented in notes as commitments/contractual commitments
- contingent liabilities = liability may become liability but depends on some future event
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