Chapter 14: Bonds and Long-Term Debt Accounting

Chapter 14

Bonds

The bylaws of corporations usually require approval by the board of directors and the stockholders before corporations can issue bonds or can make other long-term debt arrangements. Generally, long-term debt has various covenants or restrictions. The covenants and other terms of the agreement between the borrower and the lender are stated in the bond indenture or note agreemen

Various types of bond issues

(1) secured and unsecured bonds; (2) term, serial, and callable bonds; (3) convertible, commodity-backed, and deep-discount bonds; (4) registered and bearer (coupon) bonds; and (5) income and revenue bonds. The variety in the types of bonds results from attempts to attract capital from different investors and risk-takers and to satisfy the cash flow needs of the issuers

Extinguishment of debt

At the time of extinguishment of long-term debt, the unamortized premium or discount must be amortized up to the reacquisition date

Long-term notes payable

A note is valued at the present value of its expected future interest and principal cash flows, with any discount or premium being similarly amortized over the life of the note.

Whenever the face amount of the note does not reasonably represent the present value of the consideration in the exchange, a company must evaluate the entire arrangement in order to properly record the exchange and the subsequent interest.

Fair value

Fair value measurement for financial instruments, including financial liabilities, provides more relevant and understandable information than amortized cost

Noncurrent liabilities are recorded at fair value, with unrealized holding gains or losses reported as part of net income. An unrealized holding gain or loss is the net change in the fair value of the liability from one period to another, exclusive of interest expense recognized.

Long term debt

Off-balance-sheet financing is an attempt to borrow funds in such a way to prevent recording obligations. Examples of off-balance-sheet arrangements are (1) non- consolidated subsidiaries, (2) special-purpose entities, and (3) operating leases.