ACG 2021 ACG2021 StudyGuide – Chapter 10 – Everest College

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ACG 2021 ACG2021 StudyGuide – Chapter 10 – Everest College

Chapter 10Long-Term Liabilities After studying this chapter, students should be able to:

Identify the components of the Long-Term Liability category of the balance sheet (Module 1–LO1).

Define the important characteristics of bonds payable (Module 1–LO2).

Determine the issue price of a bond using compound interest techniques (Module 1–LO3).

Show that you understand the effect on the balance sheet of the issuance of bonds (Module 1–LO4).

Find the amortization of premium or discount using the effective interest method (Module 2–LO5).

Find the gain or loss on retirement of bonds (Module 2–LO6).

Determine whether a lease agreement must be reported as a liability on the balance sheet (Module 3–LO7). Explain how investors use ratios to evaluate long-term liabilities (Module 4–LO8).

Explain the effects that transactions involving long-term liabilities have on the statement of cash flows (Module 4–LO9).

Explain deferred taxes and calculate the deferred tax liability (Module 5 –LO10) (Appendix)

MODULE 1 LONG-TERM LIABILITIES INCLUDING BONDS PAYABLE Module 1 LO 1

Long-Term Liabilities Including Bonds Payable

Long-term liabilities are obligations that will not be satisfied within one year or the current operating cycle.

All liabilities that are not classified as current liabilities are long-term.

Shown after current liabilities on the balance sheet.

Examples include:

Bonds payable.

Notes payable.

Leases.

Deferred taxes. Module 1 LO 2 Bonds Payable: Characteristics Abond is a security or financial instrument that allows firms to borrow large sums of money and repay the loan over a long period of time.

Bonds are sold, or issued to investors who want a return on their investment.

Borrower (issuing firm) promises to pay interest on specific dates, usually semiannually or annually.

Borrower also promises to repay principal at maturity, or due date, of bond.

Bond certificate sets out terms of obligation and is issued at the time of the purchase.

Usually in denominations of $1,000, called face valueor par value.

Face value is the principal amount of the bond as stated on the bond certificate.

This is also the maturity value, the amount that the firm must pay at the maturity date.

Issued in very large amounts.

Bonds are traded like stocks after they have been issued.

Not always held until maturity by the initial investor.

Trading in the secondary market does not affect the financial statements of the issuing company.

Features of bonds that appear in the bond certificate (Exhibit 10-2).

Collateral represents theassets that back secured bonds in the event the issuer defaults on principal and interest payments.

Collateral represents the assets that back secured bonds in the event the issuer defaults on principal and interest payments.

ACG 2021 ACG2021 StudyGuide – Chapter 10 – Everest College

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