Problem Solving Survival Guide to accompany Intermediate Accounting, Volume 1: Chapters 1 - 14, 15th Edition

CHAPTER 14

LONG-TERM LIABILITIES

OVERVIEW

Sources of assets include current liabilities, long-term liabilities, and owners' equity. Liabilities are considered a “temporary” source of assets; whereas, owners' 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.

Although the subject of accounting for bonds is included in the principles of accounting course, many intermediate students don't remember the details of the procedures and look upon this topic as one of the most difficult they have encountered. Perhaps they have problems with the material because they try to memorize their way through the topic. As a result, it is imperative that you think about the time value of money concepts introduced in Chapter 6 and grasp how they are applied in the computations involved in accounting for long-term debt. When you see the logic and rationale ...