Ch 10 Long term liabilities

Question 1

most common long term liabilities

Answer 1

• long-term loans
• bonds payable
• lease liabilities
• pension and other post-employment benefit liabilities
• deferred income taxes

Question 2

a recorded liability is the loan’s ___________

Answer 2

principal

Question 3

mortgage

Answer 3

A debt for which some type of property, plant, and equipment is pledged as collateral in the event of default by a company.

Question 4

Instalment loans

Answer 4

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.

Question 5

Blended instalment payments

Answer 5

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.

Question 6

2 basic transactions related to debts that companies must account for:

Answer 6

1) Initial borrowing
2) Periodic loan payment

Question 7

Initial borrowing journal entry:

Answer 7

DR Cash
CR Long-term Loan Payable/Mortgage Payable

Question 8

Periodic loan payment journal entry

Answer 8

DR Interest expense
DR Long term loan payable/Mortgage payable
CR Cash

Question 9

Covenants

Answer 9

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.

Question 10

public offering

Answer 10

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.

Question 11

Institutional investors

Answer 11

Banks, insurance companies, pension funds, and other institutions that purchase corporate bonds or shares.

Question 12

Private Placement

Answer 12

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.

Question 13

Bond

Answer 13

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.

Question 14

Indenture agreement

Answer 14

An agreement that accompanies the issuance of a bond and specifies all the borrowing terms and restrictions, or covenants.

Question 15

Face value

Answer 15

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.

Question 16

Maturity date

Answer 16

The date in a bond contract that specifies when the principal amount borrowed must be repaid

Question 17

Bond interest rate

Answer 17

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.

Question 18

calculation of semi-annual interest payment to lenders:

Answer 18

Bond interest Rate * Face value / 2

Question 19

Effective rate

Answer 19

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

Question 20

Debenture

Answer 20

A bond that is issued with no specific collateral

Question 21

Debentures can be either:

Answer 21

senior or subordinated

Question 22

Senior debentures

Answer 22

A general borrowing of a company that has priority over other types of long-term borrowing in the event of bankruptcy.

Question 23

Subordinated debentures

Answer 23

A general borrowing of a company that has a lower priority than senior debentures in the event of bankruptcy.

Question 24

Convertible bonds

Answer 24

A bond that is convertible into common shares under certain conditions.

Question 25

Investment banker

Answer 25

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.

Question 26

Underwriters

Answer 26

An investment bank that arranges and agrees to sell the initial issuance of bonds or other securities.

Question 27

Green Bonds

Answer 27

Bonds that are issued by corporations or financial institutions with the proceeds of the issuance being used to fund “green” projects.

Question 28

Blue Bonds

Answer 28

Bonds that are issued by corporations or financial institutions with the proceeds of the issuance being used to fund marine protection and sustainable fisheries.

Question 29

Sustainability Bonds

Answer 29

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.

Question 30

Social Bonds

Answer 30

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.).

Question 31

Par

Answer 31

In the context of bond prices, a term used to indicate that a bond is sold or issued at its face value.

Question 32

Premium

Answer 32

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.

Question 33

Carrying value

Answer 33

The proceeds of the issuance of a bond, which is recorded as a long-term liability.

Question 34

Issuance of a bond journal entry

Answer 34

DR Cash
CR Notes Payable

Question 35

Amortization of the bond discount (or premium)

Answer 35

Difference between the contract rate and yield rate on bonds a company issues

Question 36

Determine the cash interest payment (for bonds)

Answer 36

Interest Payment = Face Value × Contract Rate × 6/12*

• done semi annually

Question 37

Determine the interest expense

Answer 37

Interest Expense = Carrying Value × Yield × 6/12*

• done semi annually

Question 38

Determine the amortization of the bond discount or premium

Answer 38

Amortization of Discount (or Premium) = Interest Expense − Interest Payment

Question 39

The journal entry at the time of the first interest payment would be

Answer 39

DR Interest Expense (carrying valueyieldnumber of months)
CR Notes Payable (amortization)
CR Cash

Question 40

pension obligation journal entry

Answer 40

DR Pension Expense
CR Pension Obligation

Question 41

the company moving money to separate pension fund entry

Answer 41

DR Pension Obligation
CR Cash

Question 42

the separate pension plan receiving money entry

Answer 42

DR Cash
CR Pension Obligation

Question 43

Debt to equity ratio

Answer 43

Net debt/ Shareholder’s equity OR
Interest bearing debt - Cash/Shareholder’s equity

Question 44

Debt to Assets ratio

Answer 44

Liabilities/ Total Assets

Question 45

Net debt to total capitalization ratio

Answer 45

Net debt/Total Capitalization OR
(interest bearing debt - cash)/(shareholder’s equity + interest bearing debt)