Reading 30- Non-Current (Long-Term) Liabilities

Question 1

Determine the initial recognition, initial measurement and subsequent measurements of bonds.

Answer 1

Long Term Liabilities= liabilities that are requiring payment after 1 year. These include long-term debt (operational leases/capital leases), bond payments for issuing companies, etc.

I/Y, N, PMT, FV, PV

Bond Issued at Par- (MARKET RATE =YTM)
Bond Issued at a Discount (MARKET RATE> YTM)
Bond Issued at a Premium (MARKET RATE< YTM)

Question 2

Describe the effective interest method and calculate interest expense, amortization of bond discounts/premiums, and interest payments.

Answer 2

Calculations to Know:

Interest Expense= COUPON RATE * PAR VALUE
Amortization of Bond Discounts/Premiums

Question 3

Explain the derecognition of debt.

Answer 3

At maturity, any original discount or premium has been fully amortized; thus, the book value of a bond liability and its face value are the same.

Question 4

Describe the role of debt covenants in protecting creditors.

Answer 4

Debt covenants are restrictions imposed by the lender on the borrower to protect the lender’s position. so, WE HAVE AFFIRMATIVE covenants:

-make timely payments of principle and interest, maintain certain financial ratios, maintain collateral exchange as well, etc.

Question 5

Describe the financial statement presentation of and disclosures relating to debt.

Answer 5

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Question 6

Explain motivations for leasing assets instead of purchasing them.

Answer 6

• If you lease an asset, then you can have additional tax benefits such as write offs. OFF BALANCE SHEET.
• Better solvency ratios
• no upfront costs
• creation of synthetic leases for tax deductions

Question 7

Distinguish between a finance lease and an operating lease from the perspectives of the lessor and the lessee.

Answer 7

• on the B/S and affects the solvency ratio.
• debt/equity ratio, total debt ratio

-A Finance Lease- most of assets useful life has been used up, put on BS, etc.

Question 8

Determine the initial recognition, initial measurement, and subsequent measurement of finance leases.

Answer 8

I kinda explained this, but IF YOU WANT TO KNOW MORE PLEASE GO TO PG 263.

Question 9

Compare the disclosures relating to finance and operating leases.

Answer 9

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Question 10

Compare the presentation and disclosure of defined contribution and defined benefit pension plans.

Answer 10

PENSION PLANS (2 TYPES):

A.) DEFINED CONTRIBUTION PENSION PLAN
+MATCH PRINCIPLE PAYMENT BY EMPLOYER
ANNUALLY

B.) DEFINED BENEFIT PLAN
+ AMORTIZED PAYMENT GIVEN TO YOU FOR 25
YEARS AND INVESTED BY IB unless THE
COMPANY GOES BANKRUPT AND THEN YOU
LOSE EVERYTHING!

Question 11

Calculate and interpret leverage and coverage ratios.

Answer 11

LEVERAGE RATIOS- we are analyzing the amount of debt that is reported according to the capital structure (debt: equity).

COVERAGE RATIOS- Focuses on the businesses’ IS to see if they can pay for the interest expenses by analyzing the net income.

a. ) interest coverage ratio= EBIT/interest expense
b. ) fixed charge coverage ratio= EBIT+lease payments/ interest payment + lease payment