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Chapter 14 Long Term Liabilities Notes

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Accounting Chapter 14: Long-Term Liabilities (Bonds and Notes) Financing Corporations: Corporations finance their operations using: 1. Short-term debt (purchasing goods or services on account) 2. Long-term debt (issuing bonds or notes payable) 3. Equity (issuing common or preferred stock) Bond: Interest-bearing note that requires periodic interest payments, with the face amount to be repaid at the maturity date ➢ Bondholders are creditors of the corporation and their claims on the corporation’s assets rank ahead of stockholders Earnings per share (EPS): Measures the income earned by each share of common stock EPS=(Net income-preferred dividends)/(Number of common shares outstanding) ➢ One of the main factors that influences the decision to issue debt or equity is the effect that various financing alternatives will have on earnings per share ➢ Also have to consider that if payments to bondholders are not made, they can seek court action and force the company into bankruptcy ○ A corporation is not legally obligated to pay dividends on preferred or common stock Nature of Bonds Payable: Principal: Face amount of each bond; amount that must be repaid on the date the bonds mature *Interest on bonds may be payable annually, semiannually, or quarterly (most bonds pay interest semiannually) Bond indenture: Underlying contract between the company issuing bonds and the bondholders ➢ The face amount and the interest rate on the bonds are identified in the bond indenture *Two ...
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