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Long-term Liabilities. ACCTG 5120 David Plumlee. Overview – L-t liabilities. Terminology Conceptual issues Bond Valuation Examples Par, below par and above par Journal entries Interest methods Between interest dates. How are L-t Liabilities Measured?.

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## Long-term Liabilities

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**Long-term Liabilities**ACCTG 5120 David Plumlee**Overview – L-t liabilities**• Terminology • Conceptual issues • Bond Valuation Examples • Par, below par and above par • Journal entries • Interest methods • Between interest dates**How are L-t Liabilities Measured?**• How are l-t liabilities valued on the balance sheet? • What interest rate is used to find the bond’s value?**Bond Terminology**• Serial vs. term • Deep discount • Debenture • Bearer or coupon • Callable • Convertible**Bond Interest**• Interest Payments equal…. • Interest Expense equals….**Data for Example**• face value = $1,000,000 • term = 5 years • issued January 1, year 1 • interest paid semi-annually, June 30 and December 31 • annual coupon rate = 10% • annual market (or effective) rate: • Case: A = 10% B = 8% C = 12%**Case A: Market = 10%**Price = PV of Maturity Value + PV of Interest Annuity**Discount or premium?**Discounts or Premia arise if the stated interest rate differs from the market rate when the debt is issued**Case B: Market = 8%**Price = PV of Maturity Value + PV of Interest Annuity**Case C: Market = 12%**Price = PV of Maturity Value + PV of Interest Annuity**What do you do with the discount or premium?**• Discounts and premia are amortized over the remaining life of the debt • Two amortization methods are possible • straight-line • effective interest**Straight-line Amortization**• Total discount or premium divided by the number of remaining interest periods is expensed each period • Interest expense is a constant amount each period • Easy to use**Effective Interest Amortization**• Discount or premium is amortized over remaining life of bond • Interest Expense is a constant % of carrying value • More representationally faithful • Required under GAAP, if materially different**A Bond Example**Alpha Corp. issued $100,000 of 8% (payable semi-annually on June 30 and December 31), 5 year bonds. The bonds were dated and sold on January 1, 1998, at an effective rate of 10 percent.**Compute the price of the bond**Maturity value of bonds payable • PV of $100,000 5 years at 10% 100,000 *.61391 (PVIF 10,5%) • PV of $4,000 at 10% annually 4000*7.72173 (PVOA 10,5%) Proceeds from sale of bonds Discount on bonds payable**Cash Interest Discount Carrying**DatePaid Expense Amortized Amt of Bonds 1-1-00 -0- -0- -0- 7-1-00 1-1-01 7-1-01 1-1-02 1-1-05 Bond Discount Amortization-SL**Cash Interest Discount Carrying**DatePaid Expense Amortized Amt of Bonds 1-1-00 -0- -0- -0- 7-1-00 1-1-01 7-1-01 1-1-02 1-1-05 Bond Discount Amortization-EI**Cash Interest Discount Carrying**DatePaid Expense Amortized Amt of Bonds 1-1-00 -0- -0- -0- 7-1-00 1-1-01 7-1-01 1-1-02 1-1-05 Bond Discount Amortization-EI 4,000 4,000 4,000 4,000 4,000**Other issues--**• Interest period and accounting period do not coincide • Apportion interest/discount or premium amounts to proper accounting periods**Extinguishment of debt**• Retirement of debt before maturity • In-substance defeasance • Irrevocably transfers assets sufficient to retire debt • Defeasance • Debtor is legally released from payments • GAAP requires gain or loss to be reported as EXTRAORDINARY item • if material • reported separately on the income statement • reported net of related taxes**Long-term notes payable**• Issued for cash and other rights • Need to record the discount and ‘rights’ • Issued for property, goods…. • Use present value of note or goods, whichever is more ‘determinable’ • Mortgage notes payable • pledges title to property as security**Off-balance-sheet financing**• Obligations that do not meet the strict definition of debt • Leases prior to FABS 13**Balance sheet presentation**• Long term debt-often single line item • Disclose next five years of debt payments • Off-balance sheet items... • Debt Extinguishment--income statement • Describe transaction • Tax effect • per share gain/loss • Analysis of debt • Times interest earned • Debt to total assets**Appendix 14 A -- FAS 114 - Loan Impairments**• Creditors perspective • Inability to collect loan and interest amounts • Creditor determines WHEN and in WHAT amount loan is impaired based on present value of expected future payments and recorded carrying value Journal entries Uncollectible accounts expense DR Allowance account CR

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