Ch 10 Long term liabilities Flashcards
(45 cards)
most common long term liabilities
- long-term loans
- bonds payable
- lease liabilities
- pension and other post-employment benefit liabilities
- deferred income taxes
a recorded liability is the loan’s ___________
principal
mortgage
A debt for which some type of property, plant, and equipment is pledged as collateral in the event of default by a company.
Instalment loans
A type of loan in which payments (including both interest and a portion of the principal) are made periodically, rather than only at the end of the loan.
Blended instalment payments
Loan payments that consist of both interest and principal, with the total amount remaining constant but the portion for interest becoming smaller as each payment is made and the outstanding loan principal is reduced. Also known as blended payments.
2 basic transactions related to debts that companies must account for:
1) Initial borrowing
2) Periodic loan payment
Initial borrowing journal entry:
DR Cash
CR Long-term Loan Payable/Mortgage Payable
Periodic loan payment journal entry
DR Interest expense
DR Long term loan payable/Mortgage payable
CR Cash
Covenants
Conditions or restrictions placed on a company that borrows money. The covenants usually require the company to maintain certain minimum ratios and may restrict its ability to pay dividends.
public offering
The offering of corporate bonds for sale to the public, both individuals and institutions. These can be sold from investor to investor and keep circling in the market.
Institutional investors
Banks, insurance companies, pension funds, and other institutions that purchase corporate bonds or shares.
Private Placement
The offering of corporate bonds for sale only to specific institutional investors, such as banks, insurance companies, and pension funds, that have agreed to purchase the bonds in advance.
Bond
A corporation’s long-term borrowing that is evidenced by a bond certificate. The borrowing is characterized by a face value, interest rate, and maturity date.
Indenture agreement
An agreement that accompanies the issuance of a bond and specifies all the borrowing terms and restrictions, or covenants.
Face value
A value in a bond contract that specifies the cash payment that will be made on the bond’s maturity date. The face value is also used to determine the periodic interest payments made on the bond.
Maturity date
The date in a bond contract that specifies when the principal amount borrowed must be repaid
Bond interest rate
An interest rate that is specified in a bond contract and used to determine the interest payments that are made on the bond. Synonym for contract rate and coupon rate.
calculation of semi-annual interest payment to lenders:
Bond interest Rate * Face value / 2
Effective rate
The interest rate that reflects the rate of return earned by investors when they purchase a bond, and the real interest cost to the issuer of the bond. It reflects the competitive market rate for similar bonds and is used in determining the selling price of the bond. Synonym for yield or market rate of interest
Debenture
A bond that is issued with no specific collateral
Debentures can be either:
senior or subordinated
Senior debentures
A general borrowing of a company that has priority over other types of long-term borrowing in the event of bankruptcy.
Subordinated debentures
A general borrowing of a company that has a lower priority than senior debentures in the event of bankruptcy.
Convertible bonds
A bond that is convertible into common shares under certain conditions.
