Sources of assets include current liabilities, long-term liabilities, and owners' equity. Liabilities are considered “temporary” sources of assets, whereas stockholders' equity is a more “permanent” source of assets. When a company borrows money, it does so with the expectation of using the borrowed funds to acquire assets that can be used to generate more income. The objective is to generate an amount of additional income which exceeds the cost of borrowing the funds (interest).
Long-term debt consists of probable future sacrifices of economic benefits arising from present obligations that are not payable within a year or the operating cycle of the business, whichever is longer. Bonds payable, long-term notes payable, mortgages payable, pension liabilities, and lease obligations are examples of long-term liabilities. This chapter will focus on the first two of these.
SUMMARY OF STUDY OBJECTIVES
- 1. Explain why bonds are issued. Companies may sell bonds to investors to raise long-term capital. Bonds offer the following advantages over common stock: (a) stockholder control is not affected, (b) tax savings result, and (c) earnings per share of common stock may be higher.
- 2. Prepare the entries for the issuance of bonds and interest expense. When companies issue bonds, they debit Cash for the cash proceeds and credit Bonds Payable for the face value of the bonds. The account Premium on Bonds Payable shows a bond premium. Discount on Bonds ...