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Chapter 10

COM 270 Chapter 10: PDF COM 270 Notes - Ch. 10

Course Code
COM 270
Graham Chris

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long-term liabilities — significant for a number of different reasons,
making them a significance to users because they:
(i) will affect the company far into the future
(ii) may be unrecorded (ex. contractual commitments or possible
outcomes of litigation proceedings)
(iii) may have a significant impact on future operating results
-common long-term liabilities include:
(a) long-term loans
(b) bonds payable
(c) lease liabilities
(d) pensions & other post-employment benefit liabilities
(e) future income taxes (due to the timing difference between
what is recorded in the FS’s & what appears on the tax
long-term loans/notes — usually paid with blended or balloon
-part of the debt market
-mortgages: long-term debt with land, building, or piece of
equipment (capital asset) pledged as collateral or security for the
financing agreement: agreement between the company
& lender, specifying the terms of the loan
generally shorter term length (1-5 years)
usually structured as an instalment loan
-instalment loans: loan principle repayments must be made
periodically, rather than at the end of the loan term, resulting
in blended payments
-blended payments: periodic payments consist of both
interest & principle components
total amount of payment is the same each period, but the
interest portion is reduced, as the principle is being repaid
loan amortization table shows how the loan is being payed off
over time, & which portion is interest & what portion is
paying off the principle amount
-balloon payment: a single, large payment at the end of
-must account for 2 basic transactions & keep track of interest
& principle amounts:
(i) initial borrowing - date loan is obtained:!
[debit Cash $$$]!
[credit Long-Term Loan/Mortgage Payable $$$]
(ii) periodic loan payment - made on payment dates: !
[debit Interest Expense $$$]!
[debit Long-Term Loan/Mortgage Payable $$$]!
[credit Cash $$$]
covenants: certain conditions or restrictions that the
borrower must meet during the loan period, in order to
protect the lender against the borrower defaulting on the
-may be financial or non-financial
bonds — an alternative way for well-known companies to raise long-
tern funds, by selling bonds to multiple investors
-part of the debt market
-generally longer term length (5-40 years)
-allow to borrow money at a lower rate than the bank would
-typically don’t have convents = allow company to be more
-public offering: open to all investors (individual &
-private offering: open to only specific institutional investors
-indenture agreement: formal agreement between a borrower
(company) & lenders (investors/bond holders), that specifies how
the borrower is to pay back the lenders, & any conditions that
must be met while the bonds are outstanding
includes the bond’s face value, coupon rate, date of
maturity, date of interest payments, & collateral pledged
against it
-technically, by being called a bond, they are collateral backed
-debenture bond: are not backed by collateral
offer a higher interest rate because of their greater risk
-convertible bonds: bonds with special provisions, allowing
them to be exchanged for a specified number of common shares
(usually at the holders choice)
-bearer bond: not registered to the owner (no name on the
-registered bond: has the owner’s name on it
-bond pricing is determined by 2 factors:
(1) PV of principle amount
(2) PV of remaining interest payments owed
influenced by the effective (market) interest rate
-market rate > coupon rate = sell at a discount
-market rate = coupon rate = sell at par (face) value
-market rate < coupon rate = sell at a premium
leases — long-term rental agreement, as an alternative to
purchasing an asset
-lease agreement: one party (the lessor) buys the asset, & the
second party (the lessee) makes periodic payments in exchange
for use of the asset over the lease term
-two categories of leases, influencing how they are accounted for:
(1) finance leases: the risks & rewards of ownership of the
leased asset has been transferred from the lessor to the
the lease is for a major part of the asset’s useful life
treated like an asset with liabilities, which are
is effectively a financing agreement with instalments
asset is recorded at its cost (measured at the PV of
future lease payments) on the statement of FP
obligation to lessor is recorded as non-current liability
on FP
repayment of principle & interest expense is
recognized over the term of the lease
depreciation expense is recorded
qualifies as a finance lease of all following criteria is
(i) the lease transfers ownership of the asset to the
lease by the end of the lease term
(ii) the lease term is the major part of the asset’s
economic life
(iii) the asset is essentially being paid for through its
lease payments
(iv) asset is of such a specialized nature, that
without major modifications, only the lessee
can use it
(2) operating leases: the lease term is a relatively short
period of time (compared to the asset’s life)
treated as an operating expense
lessee is not buying, but renting the asset
payments are only recorded as a rent expense
the asset itself, or any liability, depreciation, interest
expense, or repayment of principle is recoded
default position if doesn’t meet definition of a finance
COM 270 - Chapter 10: Long-Term Liabilities
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