1. Long Term Debt Are probable future sacrifices of economic benefitsAre probable future sacrifices of economic benefits Arise from present obligationsArise from present obligations Result from past transactions or eventsResult from past transactions or events NOT payable out of current resources or within one year or one operating cycle (whichever is longer)NOT payable out of current resources or within one year or one operating cycle (whichever is longer) bonds payable,bonds payable, mortgage notes payable,mortgage notes payable, long-term notes payable,long-term notes payable, lease obligations, andlease obligations, and pension obligationspension obligationsExamples

2. Note or Bond Issuance Journal Entries Issuance: Dr CashAmntRec’d Dr Discount on Notes/BondsPayableDif Cr Premium on Notes/BondsPayable Dif Cr Notes/Bonds Payable FaceValue Interest Date -- Amortize using the Effective Interest Method: Dr Interest ExpenseEffRate Dr Premium on Notes/BondsPayable Dif Cr Discount on Notes/BondsPayable Dif Cr Cash or the Liability AmntPd

3. Bond Valuation The price of a bond is determined by the interaction between the bond's stated interest rate and its market rate. The price of a bond is determined by the interaction between the bond's stated interest rate and its market rate. If StatedRate = MarketRate, Bonds sell at parIf StatedRate = MarketRate, Bonds sell at par If StatedRate < MarketRate, Bonds sell at a discountIf StatedRate < MarketRate, Bonds sell at a discount If StatedRate > MarketRate, Bonds sell at a premiumIf StatedRate > MarketRate, Bonds sell at a premium

4. Interest Expense Accrues with the Passage of Time Effective Interest Method -- preferredEffective Interest Method -- preferred –Interest is Paid based on the coupon rate –Interest is Expensed based on the effective rate at issuance –Discount/Premium is Amortized as the difference Straight-Line Method -- acceptable if immaterial differencesStraight-Line Method -- acceptable if immaterial differences –Interest is Paid based on the coupon rate –Discount/Premium is Amortized equally (straight-line) over time –Interest is Expensed as a plug figure

5. Amortization Options: Amortize using the Effective Interest Method (preferred): Dr Interest ExpenseEffRate Dr Premium on Notes/BondsPayable Dif Cr Discount on Notes/BondsPayable Dif Cr Cash or the Liability AmntPd Amortize using the Straight-Line Method (ok if immaterial dif): Dr Interest ExpensePlug Dr Premium on Notes/BondsPayable SLPortion Cr Discount on Notes/BondsPayable SLPortion Cr Cash or the Liability AmntPd

6. Accounting for bonds issued between interest dates Dr CashAmntRec’d Cr Bonds PayablePrinciple Cr Bond Interest ExpenseAccrued Record Bond Issuance at 100 Dr Bond Interest ExpenseP x I x T Cr CashAmntPd To record the periodic interest payment (the correct interest expense for the period outstanding is “Debit” - “Credit” net amount

7. Bond Issue Costs … may be capitalized Issuance costs are debited to a deferred charge account (an asset) such as “Unamortized Bond Issue Costs” and amortized over the life of the issue, usually using a straight-line method. APB # 21

8. Extinguishment of Debt … by payment to the creditor -or- … by reacquisition in the open market 1st, update -- that is amortize any unamortized premium or discount, and any costs of issue related to the bonds up to the reacquisition date1st, update -- that is amortize any unamortized premium or discount, and any costs of issue related to the bonds up to the reacquisition date 2nd, calculate the gain or loss as the difference between the reacquisition price and the net carrying amount of the debt2nd, calculate the gain or loss as the difference between the reacquisition price and the net carrying amount of the debt 3rd, report this gain or loss in income in the period of redemption as an extraordinary item3rd, report this gain or loss in income in the period of redemption as an extraordinary item –(exception: gains & losses from certain sinking-fund purchases are not required to be classified as extraordinary)