Ch 14 Long Term Liabilties Flashcards
Intermediate Accounting; Kieso, Weygandt, Warfield; 15th edition
bearer (coupon) bonds
Bonds without the name of the owner, which may be transferred from one owner to another by mere delivery. (p. 765).
bond discount
The difference between the face value of a bond and its selling price when the bond sells for less than face value. (p. 767).
bond indenture
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).
bond premium
The difference between the face value of a bond and its selling price when the bond sells for more than face value. (p. 767).
callable bonds
Bonds that give the issuer the right to call and retire the bonds prior to maturity. (p. 765).
carrying value
The face amount of a bond minus any unamortized discount, or plus any unamortized premium. Synonymous with the term book value. (p. 7707).
commodity-backed bonds
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).
convertible bonds
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).
debenture bonds
Unsecured bonds, which are issued against the general credit of the borrower (issuer). (p. 765).
debt to assets ratio
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).
deep-discount (zero-interest) debenture bonds
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).
discount
If bonds sell for less than face value. (p. 767).
effective-interest method
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).
effective yield, or market rate
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).
extinguishment of debt
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).
face, par, principal, or maturity value
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).
fair value option
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).
imputation
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).
imputed interest rate
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).
income bonds
Bonds that pay no interest unless the issuing company is profitable. (p. 765).
long-term debt
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).
long-term notes payable
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).
mortgage notes payable
A promissory note secured by a document called a mortgage, which pledges title to property as security for the loan. (p. 782).
off-balance-sheet financing
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).
premium
If bonds sell for more than face value. (p. 767).
refunding
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).
registered bonds
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).
revenue bonds
Bonds that pay interest from specified revenue sources (e.g., airports, school districts, counties, toll-road authorities, and governmental bodies). (p. 765).
secured bonds
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).
serial bonds
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).
special-purpose entity (SPE)
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
