Financial 5 - Long Term Liabilities

Question 1

Normal Present Value

Answer 1

Formula:

Present Value = Future Amount * Present Value Factor

Question 2

How does Long term Debt Mature?

Answer 2

RULE: Current Maturities of LTD in the BS should include amounts due and payable within 12 months of the BS date

** A sinking fund requirement would be disclosed in the footnotes, but will not be included in the current maturity of long-term debt

Question 3

Proper Valuation of Long term Debt

Answer 3

• Bonds or notes due within one year are shown as “noncurrent” if the issuer has the intent and ability to refinance with a new issuance of LTD. This intent must be demonstrated through the refinancing of debt after the balance sheet date, but before the issuance of the FS. Separate disclosure of the refinancing is required

Question 4

Formula for Finding Annual Deposits with Known Accumulation Amount

Answer 4

• If a company plans to accumulate a certain amount of money, use this formula to find the annual deposits:

Amount to be Calculated (accumulated) (at end date)
/
Future Amount of annuity in advance (@ Interest rate for remaining periods until end date)

Question 5

Usual vs. Customary Trade Terms

Answer 5

Usual trade terms arise from transactions with customers or suppliers in the normal course of business

• Normally interest is imputed when no, or an unreasonably low rate is stated. There is an exception when the usual trade terms do not exceed 1 year.

** If < 1 year, the note payable will be recorded at face value (under custom or usual trade terms)

Question 6

Present Value of Note Payable (First Payment made at the end of the period)

Answer 6

PV of the note at Period End = Annual Payment * PV of Ordinary Annuity (@ interest rate for this type of note at date of issuance for # of periods of remaining installments)

• In the example, the note required 8 installments but 1 payment was made on Dec 30 before YE, so remaining periods become 7