Ch 14 Long Term Liabilties

Question 1

bearer (coupon) bonds

Answer 1

Bonds without the name of the owner, which may be transferred from one owner to another by mere delivery. (p. 765).

Question 2

bond discount

Answer 2

The difference between the face value of a bond and its selling price when the bond sells for less than face value. (p. 767).

Question 3

bond indenture

Answer 3

A contract for a bond that represents a promise to pay a sum of money at a designated maturity rate, plus periodic interest at a specified rate on the maturity amount (face value). (p. 764).

Question 4

bond premium

Answer 4

The difference between the face value of a bond and its selling price when the bond sells for more than face value. (p. 767).

Question 5

callable bonds

Answer 5

Bonds that give the issuer the right to call and retire the bonds prior to maturity. (p. 765).

Question 6

carrying value

Answer 6

The face amount of a bond minus any unamortized discount, or plus any unamortized premium. Synonymous with the term book value. (p. 7707).

Question 7

commodity-backed bonds

Answer 7

Bonds that are redeemable in measures of a commodity (e.g., barrels of oil, tons of coal, or ounces of rare metal). Also called asset-linked bonds. The accounting problem for such bonds is to project their maturity value in markets where commodity prices fluctuate. (p. 765).

Question 8

convertible bonds

Answer 8

Bonds that permit holders to exchange them for (?convert them to?) other securities of a corporation (typically common stock) for a specified time after issuance. (p. 765).

Question 9

debenture bonds

Answer 9

Unsecured bonds, which are issued against the general credit of the borrower (issuer). (p. 765).

Question 10

debt to assets ratio

Answer 10

Coverage ratio that measures the percentage of the total assets provided by creditors. Computed as total liabilities divided by total assets. The higher the percentage of debt to assets, the greater the risk that the company may be unable to meet its maturing obligations. (p. 787).

Question 11

deep-discount (zero-interest) debenture bonds

Answer 11

Long-term, unsecured debt securities that do not bear interest. They are sold at a discount that provides the buyer?s total interest payoff at maturity. Also called zero-interest debenture bonds. (p. 765).

Question 12

discount

Answer 12

If bonds sell for less than face value. (p. 767).

Question 13

effective-interest method

Answer 13

The preferred procedure for computing the amortization of a discount or premium. Under this method, companies compute bond interest expense (revenue) at the beginning of the period by the effective-interest rate) and then subtract bond interest paid (calculated as the face amount of the bonds times the stated interest rate); the result is the amortization amount. (p. 770).

Question 14

effective yield, or market rate

Answer 14

The rate of interest the bondholders actually earn on a bond (and which takes into account the frequency of compounding). If bonds sell at a discount, the effective yield exceeds the stated rate; if bonds sell at a premium, the effective yield is lower than the stated rate. (p. 767).

Question 15

extinguishment of debt

Answer 15

The payment of debt. If a company holds a debt security to maturity, it does not compute any gains or losses; the carrying amount will equal the maturity (face) value of the bond. If a company extinguishes debt prior to maturity, it must calculate any gain or loss from extinguishment and report such gain or loss in net income. (p. 775).

Question 16

face, par, principal, or maturity value

Answer 16

On a bond, the amount of capital that must be repaid at maturity. The terms face value, par value, principal amount, or maturity value are used interchangeably. (p. 766).

Question 17

fair value option

Answer 17

The recording of financial assets or financial liabilities at fair value, with unrealized holding gains and losses reported as part of net income. (p. 782).

Question 18

imputation

Answer 18

The process of interest-rate approximation, which occurs when a company cannot determine the fair value of the property, goods, services, or other rights, and if the note has no ready market. (p. 780).

Question 19

imputed interest rate

Answer 19

The result of interest-rate approximation, which occurs when a company cannot determine the fair value of the property, goods, services, or other rights, and if the note has no ready market. (p. 780).

Question 20

income bonds

Answer 20

Bonds that pay no interest unless the issuing company is profitable. (p. 765).

Question 21

long-term debt

Answer 21

Probable future sacrifices of economic benefits arising from present obligations that are not payable within a year or the operating cycle of the company, whichever is longer. Examples are: bonds payable, long-term notes payable, mortgages payable, pension liabilities, and lease liabilities. (p. 764).

Question 22

long-term notes payable

Answer 22

Similar in substance, in that both have fixed maturity dates and carry a stated or implicit interest rate, but notes do not trade as readily as bonds in the organized public securities market. (p. 776).

Question 23

mortgage notes payable

Answer 23

A promissory note secured by a document called a mortgage, which pledges title to property as security for the loan. (p. 782).

Question 24

off-balance-sheet financing

Answer 24

Borrowing funds in a way that avoids recording the obligations. Examples of such arrangements are nonconsolidated subsidiaries, special-purpose entities, and operating leases. Companies engage in off-balance-sheet financing as a way to remove debt from the balance sheet or bypass loan covenants. In response to off-balance-sheet financing gone bad (e.g., Enron), the FASB has tightened the rules that allow off-balance sheet accounting and increased disclosure (note) requirements related to this type of financing. (p. 783).

Question 25

premium

Answer 25

If bonds sell for more than face value. (p. 767).

Question 26

refunding

Answer 26

The replacement of an existing bond issue with a new one. A company may find it advantageous to acquire its entire outstanding bond issue and replace it with a new bond issue bearing a lower rate of interest. The company should recognize as income the gain from the refunding in the period of redemption. (p. 776).

Question 27

registered bonds

Answer 27

Bonds issued in the name of the owner. At redemption or in a sale of the bond, they require surrender of the certificate. (p. 765).

Question 28

revenue bonds

Answer 28

Bonds that pay interest from specified revenue sources (e.g., airports, school districts, counties, toll-road authorities, and governmental bodies). (p. 765).

Question 29

secured bonds

Answer 29

Bonds backed by a pledge of some sort of collateral. For example, mortgage bonds are secured by a claim on real estate; collateral trust bonds are secured by stocks and bonds of other corporations. (p. 765).

Question 30

serial bonds

Answer 30

Bond issues that mature in installments. School or sanitary districts, municipalities, or other local taxing bodies that receive money through a special levy frequently use serially maturing bonds. (p. 765).

Question 31

special-purpose entity (SPE)

Answer 31

A legal entity created to perform a special activity (issue securities, complete a project, perform R&D activities). The company that creates the SPE guarantees that it or some outside party will eventually perform the activity. Use of the SPE