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Financial Accounting in an Economic Context, 9th Edition by Jamie Pratt

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CHAPTER 11

Long-Term Liabilities: Notes, Bonds, and Leases

Key Points

The following key points are emphasized in this chapter:

  • Long-term notes payable, bonds payable, leasehold obligations, and how companies use these instruments as important sources of financing.
  • Economic consequences created by borrowing.
  • Different forms of contractual obligations.
  • The effective interest rate and how it is determined for contractual obligations.
  • The effective interest method.
  • How changes in market interest rates can lead to misstated balance sheet values for long-term liabilities.
  • Operating leases, capital leases, and off-balance-sheet financing.

Ready Mix Inc. is a publicly traded company that provides concrete mix to homebuilders, subcontractors, pool builders, homeowners, and industrial property developers, primarily in the southwestern United States, a region stunned by the 2008–2009 housing crisis. Ready Mix finances its business and its fleet of concrete trucks with long-term debt, primarily from Wells Fargo and the National Bank of Arizona. In its 10-Q filing with the SEC for the third quarter of 2009, Ready Mix disclosed that it had violated financial covenants in the loan contracts with both banks. Wells Fargo waived the violations, but required additional fees and collateral; National Bank of Arizona had not yet waived the violations and could still demand immediate payment of the principal. The 10-Q also stated that Ready Mix expected, as of December 31, 2009, to be in violation ...

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