Chapter 10 Accounting - Long term liabilities, advantages and disadvantages PDF

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Long term liabilities, advantages and disadvantages...

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Chapter 10 Accounting Long Term Liabilities Bond Advantages: Do not affect owner control, interest on bonds is tax deductible, can increase return on equity. Disadvantages: Require payments of interest and par value by date of maturity, can decrease return on equity. A company sells bonds to investors, and to underwriters, who sell them to investors. Interest payment = par value times time times contract interest rate Stated rate Above market rate—at a premium Stated rate Below market rate—at a discount State Rate Equal to market rate—at par value Par value minus cash proceeds equals discount Discount on Bonds Payable is a contra-liability account Amortization—decrease in amount of discount or premium per installment payment Maturity Value equals principal value of bond Entry that marks payment of interest: Cash minus premium amortization, or plus discount amortization, equals bond interest expense Each year, principal payment increases, ointerest payment decreases Types of bonds: Term/Serial, Registetred/Bearer, Convertible, Callable, Secured/Unsecured Debt-to-Equity Ratio equals Total Liabilities over total equity Effective Interest Amortization: Cash Interest Paid = half of contract rate times par value Interest Expense = half of market rate times previous carrying value Premium Amortization: difference between two above...