What is LongTerm Liabilities LongTerm Liabilities are all
What is Long-Term Liabilities? Long-Term Liabilities are all the entity’s obligation that need to pay in the future. Note that all the debt that have a maturity date of more than one year are classified as long-term liabilities. Long-Term Liabilities are : - Bonds payable - Note payable - lease liabilities - Mortgage payable
Bonds payable: are the long-term debt instruments that are written promises to pay the principle borrow at the specific future date. Characteristic of Bonds: From the issuer’s point of view, a bonds represents an obligation to pay a sum of money to the bondholder on the bonds maturity date. The amount to be paid at maturity is the face value of the bonds. Most bonds also require the issuer to make the interest payments based on stated interest rate at regular intervals over the life of bonds.
Advantages of bonds: - bonds do not effect stockholder - Interest on bonds is tax deductible - Bonds can increase return on equity. Disadvantages of bonds: - Bonds requirement of both periodic interest and par value at maturity -Bonds can decrease return on equity when the company pay more interest than of earns on the borrow fun.
Type of bonds: - Secured and Unsecured bonds - Term bonds - Serial bonds - Convertible bonds - Callable bonds Issuing bonds: Party that issues the bond ( for the borrow )
Ex. King co. issues the following bonds on January 1, 2005 Par value = $1, 000 State interest Rate = 10% Interest Rate = 6/30 and 12/31 Bonds date = Jan. 31, 2004 (20 year) Jan. 1 Cash Bonds payable Jan. 30 Bonds interest exp Cash Dec. 31 Bonds payable Cash $1, 000, 000 $50, 000 $1, 000, 000
Issuing bonds discount: A bonds would normally be sold at s discount when the face interest is below the market interest rate. The discount is considered an incremental interest expense, which is amortized over the life of the bonds.
Ex. On January 1, Smith Corporation sold $50, 000 10 year, 15 percent bonds at 94. Interest payable serniannually on June 30 and December 31. The entry to record the issuance of the bonds is Jan. 1 Cash $47, 000 Discount on bonds payable $3, 000 Bonds payable $50, 000 Partial Balance sheet Long-Liabilities Bonds payable Less: Discount on bonds payable Carrying Value $50, 000 3, 000 $47, 000
Over the life of the bonds are issued, the carrying value increase gradually until its equal the maturity value. The record the interest payment are Jan 30 Interest expense Cash Dec. 31 Interest expense Cash 3, 750
Issuing bonds at premium: A bonds would normally be sold at premium if its face (nominal) interest rate exceeds the current market rate for a comparable quality bonds. The premium should be not considered income but rather interest received in advance that be served to adjust the contract rate interest. The Premium account is amortized over the life of bonds as reduction of interest expense.
Ex. On January 1, Smith Corporation sold $50, 000 105 year, percent bonds at 105. Interest payable semi annually on Junee 30 and December 31. The entry to record the issuance is Jan. 1 Interest expense $52, 500 bonds payable $50, 000 Premium on bonds payable $2, 50 The entries for the semi annul interest payment are Jan 30 Interest expense 3, 750 Cash 3, 750 Dec. 11 Interest expense 3, 750 Cash 3, 750
Issuing bonds between the interest dates: When bonds are sold between interest dates the purchaser must pay the interest that has been accrued subsequent to the last interest payment dates. This is because at the next interest dates the purchaser will receive the interest for the full period. The net effect is that the purchaser will earn the interest he or she is entitled to for the period he or she held the bonds.
Ex. March 1, 20 X 1, a company issues $50, 000 of 10 year, 15 percent bonds at face value. The bond are date January 1, 20 X 1. Interest Is payable on July 1. The entry to the issues is 20 X 1 Jan 1 Cash $51, 250 Bond payable Interest Expense The first interest payment on July 1 20 x 1 July 1 Interest expense $3, 750 Cash $50, 000 $1, 250 $3, 750
Long-Term Note payable Long-term Note payable usually have term from two to five year. Payment on these notes frequently include both interest and principle. For example, when you make payment on your car loan, you are paying interest as well as repaying some of the principal
Mortgage Note and bonds: - A legal agreement that helps protect the lender if the borrow fails to make the required payments. - Give the lender the right to be paid out of the cash proceeds from the sale of the borrower’s assets specifically Identified in the mortgage contract.
Pledged Assets to secured liabilities Pledged assets to secured = liabilities Book value of pledged assets Book value of secured liabilities This ratio help creditors determine whether the pledged assets of a debtor provide adequate security for secured debt obligations.