1. Long-Term Liabilities - Chapter 10 Financial & Managerial Accounting, 8th Edition by Needles, Powers, Crosson

2. Key Concepts / Terms Growth of a business requires investment in long-term assets, research and development, and other activities that will produce income in future years. Accomplished through the issuance of long- term debt and/or issuance of capital stock. There are advantages and disadvantages to both.

3. Key Concepts / Terms Evaluating long-term debt: –Debt to equity ratio = Total liabilities ÷ Total stockholders’ equity Helps management decide how much debt to carry. Typically, a smaller ratio is better. –Interest coverage ratio = Income before income taxes + Interest expense ÷ Interest expense A common measure of how much risk a company undertakes. Typically, the higher the ratio, the better.

4. Key Concepts / Terms Types of long-term debt: –Bonds payable (many creditors) –Notes payable (promissory note – single creditor) –Mortgages payable –Long-term leases (operating vs. capital) See pages 524 and 525 in the textbook. –Pension liabilities

5. Key Concepts / Terms Types of long-term debt (con’t): –Deferred income taxes Bond: a security, usually long-term, representing money that a corporation borrows from the investing public. Federal, state and local governments also issue bonds to raise money.

6. Key Concepts / Terms Bond issue: the total value of the bonds issued at one time. Face interest rate: the fixed rate paid to bondholders based on the face value of the bonds. Fixed over the life of the bonds. Market interest rate: the rate of interest paid in the market on bonds of similar risk. Also called the effective interest rate.

7. Key Concepts / Terms Bonds issued at face value: Cash100,000 Bonds Payable100,000 Sold $100,000 of 9% 5-year bonds at face value Interest payments for bonds sold at face value: Bond Interest Expense 4,500 Cash (or Interest Payable) 4,500 Paid (or accrued) semiannual interest to bondholders of 9%, 5-year bonds

8. Key Concepts / Terms Bonds issued at a discount: Cash96,149 Unamortized Bond Discount 3,851 Bonds Payable100,000 Sold $100,000 of 9%, 5-year bonds at 96.149 Bonds issued at a premium: Cash104,100 Unamortized Bond Premium 4,100 Bonds Payable100,000 Sold $100,000 of 9%, 5-year bonds at 104.1

9. Key Concepts / Terms Amortizing a bond discount (use straight-line method ONLY). See pages 538 and 539. 1.Total number of interest payments = Interest payments per year x life of bonds (2 x 5 = 10) 2.Amortization of bond discount per interest period = Bond discount ÷ Total interest payments ($3,851 ÷ 10 = $385) 3.Cash interest payment = face value x face interest rate x time ($100,000 x 9% x 6/12 = $4,500) 4.Interest expense per interest period = Interest payment + amortization of bond discount ($4,500 + $385)

10. Key Concepts / Terms Semi-annual journal entry: Bond Interest Expense4,885 Unamortized Bond Discount 385 Cash (or Interest Payable)4,500 Paid (or accrued) semiannual interest to bondholders and amortized the bond discount on 9%, 5-year bonds

11. Key Concepts / Terms Amortizing a bond premium (use straight-line method ONLY). See pages 542 and 543. 1.Total number of interest payments = Interest payments per year x life of bonds (2 x 5 = 10) 2.Amortization of bond premium per interest period = Bond premium ÷ Total interest payments ($4,100 ÷ 10 = $410) 3.Cash interest payment = face value x face interest rate x time ($100,000 x 9% x 6/12 = $4,500) 4.Interest expense per interest period = Interest payment - amortization of bond premium ($4,500 - $410)

12. Key Concepts / Terms Semi-annual journal entry: Bond Interest Expense4,090 Unamortized Bond Premium 410 Cash (or Interest Payable)4,500 Paid (or accrued) semiannual interest to bondholders and amortized the bond premium on 9%, 5-year bonds

13. Key Concepts / Terms Other bond items (see pages 546-551): –Retirement (gain or loss) Calling bonds Converting bonds –Sale of bonds between interest dates Collect from the investors the interest that would have accrued for the partial period preceding the issue date, and at the end of the first period, they pay the interest for the entire period.

14. Key Concepts / Terms Other bond items (con’t): –Sale of bonds between interest dates (con’t) Causes a credit to bond interest expense. When the semi-annual payment is made, a debit to bond interest expense is recorded The result of the initial credit and this debit is the amount of interest expense from the time the bonds were purchased. Example: page 548 –Year-end accrual of bond interest expense