Ch 10 Long term liabilities Flashcards
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.
Investment banker
The intermediary who arranges the issuance of bonds in the public debt market on behalf of others. The investment banker sells the bonds to its clients before the bonds are traded in the open market.
Underwriters
An investment bank that arranges and agrees to sell the initial issuance of bonds or other securities.
Green Bonds
Bonds that are issued by corporations or financial institutions with the proceeds of the issuance being used to fund “green” projects.
Blue Bonds
Bonds that are issued by corporations or financial institutions with the proceeds of the issuance being used to fund marine protection and sustainable fisheries.
Sustainability Bonds
Bonds that are issued by corporations or financial institutions where the proceeds of the issuance must be used to contribute to the United Nations Sustainable Development Goals.
Social Bonds
Bonds that are issued by corporations or financial institutions where the proceeds of the issuance must be used to fund social assets (such as affordable housing, Indigenous communities and businesses, etc.).
Par
In the context of bond prices, a term used to indicate that a bond is sold or issued at its face value.
Premium
In the context of bond prices, a term used to indicate that a bond is sold or issued at an amount above its face value.
Carrying value
The proceeds of the issuance of a bond, which is recorded as a long-term liability.
Issuance of a bond journal entry
DR Cash
CR Notes Payable
Amortization of the bond discount (or premium)
Difference between the contract rate and yield rate on bonds a company issues
Determine the cash interest payment (for bonds)
Interest Payment = Face Value × Contract Rate × 6/12*
- done semi annually
Determine the interest expense
Interest Expense = Carrying Value × Yield × 6/12*
- done semi annually
Determine the amortization of the bond discount or premium
Amortization of Discount (or Premium) = Interest Expense − Interest Payment
The journal entry at the time of the first interest payment would be
DR Interest Expense (carrying valueyieldnumber of months)
CR Notes Payable (amortization)
CR Cash
pension obligation journal entry
DR Pension Expense
CR Pension Obligation
the company moving money to separate pension fund entry
DR Pension Obligation
CR Cash
the separate pension plan receiving money entry
DR Cash
CR Pension Obligation
Debt to equity ratio
Net debt/ Shareholder’s equity OR
Interest bearing debt - Cash/Shareholder’s equity
Debt to Assets ratio
Liabilities/ Total Assets
Net debt to total capitalization ratio
Net debt/Total Capitalization OR
(interest bearing debt - cash)/(shareholder’s equity + interest bearing debt)
