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Wiley GAAP 2008 by Colorado Steven M. Bragg Englewood, Ralph Nach American Express Tax and Business Inc., Barry J. Epstein

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Perspective and Issues

Long‐term (or noncurrent) liabilities are liabilities that will be paid or otherwise settled over a period of more than one year, or if longer, greater than one operating cycle. This chapter discusses accounting for bonds, long‐term notes payable, mandatorily redeemable shares, and obligations to issue or repurchase the entity's own shares. Other common types of long‐term liabilities are lease obligations (Chapter 16), deferred income taxes (Chapter 17), pension and deferred compensation plan obligations (Chapter 18), and contingencies (Chapter 14).

The appropriate valuation of long‐term debt at the date of issuance is the present value of the future payments, using an interest rate commensurate with the risks involved. In many situations the interest rate commensurate with the risks involved is the rate stated in the agreement between the borrower and the creditor. However, in other situations the debt may be noninterest‐bearing, or the rate stated in the agreement may not be indicative of the rate applicable to a borrower having similar creditworthiness and debt having similar terms. In other words, the rate stated in the agreement is not commensurate with the risks involved. To reflect the liability at the appropriate value, interest must be imputed at the market rate, and the resulting premium or discount is amortized as interest over the life of the agreement (per APB 21).

Debt remains on the books of the debtor until it is extinguished. In most cases, ...

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