Chapter 10- Long-term Liabilities

Question 1

Types of long term liabilities

Answer 1

long term loans, bonds payable, lease liabilities, pension, future income taxes

Question 2

Long term liabilities w lenders

Answer 2

company and lender enter into a financing agreement, loan or mortgage

Question 3

Payments for loans and mortgages

Answer 3

instalment loans with periodic payments of blended payments (interest + principal), monthly

Question 4

Bonds

Answer 4

• stock market or debt market

- borrowing long-term funds to support operations from a bank or financial institution called an indenture agreement

Question 5

Mortgage loan

Answer 5

loan with link to real estate making capital asset collateral as the loan is repaid, by a single lender, paid monthly

Question 6

Bond characteristics

Answer 6

• usually face value of $1000
• semi annual interest payments
• bond interest rate (can fluctuate w market)
• may by collateral backed
• Debenture bond (no collateral)
• Convertible bonds (into common shares)

Question 7

Bond pricing

Answer 7

repayment of principal loan + periodic interest payments, recorded at carrying value always

Question 8

Lease agreement

Answer 8

one party buys assets and the second party makes periodic payments in exchange for the use of the asset over the lease term

Question 9

Why lease?

Answer 9

• frees up capital
• unwilling or unable to get loan to finance it
• short term need for asset
• lowers lessee’s risk to that asset will become obsolete
• may opt out of using asset for entire useful life

Question 10

Pension

Answer 10

agreement w employer + employees resulting the employer providing pension benefits upon retirement

• most common long term liability w employers
• pension expense is always recognized

Question 11

Defined Pension Plan

Answer 11

• defined contribution that both employee and employer contribute
• guarantees years of pension
• contributed amounts must always be disclosed

Question 12

Hybrid Pension Plan (target benefit plans)

Answer 12

• combines features establishing targeted benefit levels funded by fixed contributions by employer and employee
• not always guaranteed

Question 13

Differed Income Tax

Answer 13

• income tax payable to the CRA in the future
• where company’s income taxes are higher in the future between accounting standards
• is a liability in Canadian standards

Question 14

Mutually unexecuted contracts

Answer 14

• company’s have just entered contracts for future transactions (purchases, operating leases, utility contracts)

Question 15

Contigent Liabilities

Answer 15

• future obligation is contingent on certain events occurring outside company control (defendant in lawsuit)
• uncertainty with respect to timing or amount

Question 16

Yield

Answer 16

effective rate used to determine the amount pf interest expense that will be recorded by the issuer

Question 17

Finance lease

Answer 17

company accounts for the transaction as if it had borrowed money and purchased the asset

Question 18

Operating lease

Answer 18

rental agreement where ownership is not intended

Question 19

Defined Contribution Plan

Answer 19

• employer is only responsible for funding it’s contribution