Review: Long-Term Debt Part 1

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From the course by University of Illinois at Urbana-Champaign

Accounting Analysis II: Measurement and Disclosure of Liabilities

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University of Illinois at Urbana-Champaign

Accounting Analysis II: Measurement and Disclosure of Liabilities

12 ratings

Course 3 of 5 in the Specialization Financial Reporting

This course is the third course in the five-course Financial Reporting Specialization. This course begins with a discussion of current liabilities and contingencies and continues with long-term debt and bonds. The course next explores accounting model for leases, both lessees and lessors, and a discussion on deferred tax assets and liabilities. Participants will learn the latest accounting standards including the new accounting model for leases effective for public companies in 2019 and private companies in 2020.

From the lesson

Module 8: Review and Evaluation

This module will be a review of the previous seven modules. This will include the concepts of: current liabilities, contingencies, bonds, discounts and premiums of bonds, troubled debt restructuring types, lease determinations and classifications, lease modifications, sale and leasebacks, deferred tax liabilities and assets, carrybacks and carryforwards, and uncertain tax positions.

Review: Long-Term Debt Part 13:00

Meet the Instructors

John Hepp
Clinical Assistant Professor of Accountancy
Department of Accountancy

Welcome to this review lesson.

We're going to look back at long-term debt.

Now, we talked there about installment loans and bonds.

The periodic payments of principal and interest that are over the term of the loan.

They're all very similar. What's the difference?

Well, installment loans are usually to a single party or maybe a syndicate.

But bonds are often broken up,

so that you can have multiple bond holders and it allows

the lenders to spend their risk over multiple lenders,

and it also allows the borrower to often

raise more money than they could directly with just a loan.

We talked about common types of bonds.

Convertible debt, zero coupon bonds

and how you would have to determine an effective interest rate,

index debt, perpetual debt, increasing rate debt.

We talked about using the effective interest rate in order to recognize interest expense.

This is the rate of return implicit in the loan.

The contractual interest rate adjusted for

any net deferred loan fees or cross premium, or discount.

Talk about discount, means that the cash proceeds are

less than the face amount of the bonds,

and the effective interest rate therefore is higher.

Talk about premium.

Premium means that cash proceeds are greater than the face amount of the bonds,

and the effective interest rate therefore is lower.

We talked about debt issuance costs.

These are incremental costs that are incurred in order to issue debt,

they were previously sometimes

capitalized and accounted for as if they were a separate asset,

but FASB recently changed that.

So now, they'll be viewed as a decrease in the premium or an increase in the discount.

And we illustrated this in our discussion of the accounting for a discount.

Now subsequently, the bond premium or discount is

amortized to provide a constant effective interest rate.

And the way you do that,

you have your effective rate and for each period,

the interest expense is going to be that effective rate times the carrying value.

And then the difference between the cash paid and

the interest expense is the amortization of the premium or discount.

Now, you can use other methods if the results are not materially different,

say, if the premium or discount is very, very small.

The premium or discount can be amortized straight-line if the difference is immaterial.

And then finally, in this lesson,

we talked about the fair value option which permits all entities to choose to measure

eligible items at fair value as specified election dates and it can be applied to debt.

There are peculiar rules that apply to that including the fact that

some of the change in the fair value will be recognized in other comprehensive income.

So that concludes the first part of our discussion about bonds and long terms debt.

We'll continue in the next lesson with part two.

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