Accounting Review: Liabilities, Bonds, and Leases

Vocabulary practice flashcards covering current liabilities, loss contingencies, bonds, leases, and present value tables based on lecture sources.

Current Liability

A liability expected to be settled within one year or the operating cycle, whichever is longer.

Customer Advances

Liabilities created when cash is received before goods or services are provided, remaining liabilities until the company fulfills its obligation.

Loss Contingency (Probable and Estimable)

An uncertain situation where a loss is both probable and reasonably estimable, requiring the company to accrue both the loss and liability.

Loss Contingency (Reasonably Possible)

An uncertain loss scenario that is reasonably possible, which generally requires disclosure in the financial statement notes rather than accrual.

Loss Contingency (Remote)

An uncertain loss scenario where the chance of occurrence is remote, requiring neither accrual nor disclosure.

Gain Contingency

A potential gain that is usually disclosed when appropriate, but income is not recognized until realized to avoid recognizing income before it is certain.

Debt-to-Equity Ratio

A financial ratio calculated as $\text{Total Liabilities} \div \text{Total Stockholders' Equity}$, indicating the proportion of creditor financing relative to owner financing.

Times Interest Earned Ratio

A solvency metric calculated as $(\text{Income Before Taxes} + \text{Interest Expense}) \div \text{Interest Expense}$ or $\text{EBIT} \div \text{Interest Expense}$, measuring ability to cover interest obligations.

Discount on Notes Payable

Represents interest associated with a note issued below face value, which is amortized into interest expense over the life of the note.

Bond Face Amount

The principal amount repaid to bondholders at the maturity date.

Stated Rate

The coupon rate used with face value to determine periodic cash interest payments.

Effective Market Rate

The yield or return investors require when a bond is issued, used to price the bond and calculate interest expense.

Bond Discount

Occurs when $\text{Market Rate} > \text{Stated Rate}$, causing the bond issue price to be below its face value.

Bond Premium

Occurs when $\text{Market Rate} < \text{Stated Rate}$, causing the bond issue price to be above its face value.

Lessee

The party in a lease agreement receiving the right to use an underlying asset.

Lessor

The party in a lease agreement providing the underlying asset or right to use it.

Finance Lease

A lessee lease classification that economically resembles purchasing an asset with financing, triggered if ownership transfers, a purchase option is reasonably certain, lease term is $\ge 75\%$ of economic life, PV of payments is $\ge 90\%$ of fair value, or the asset is specialized.

Operating Lease

A lessee lease classification that economically resembles renting an asset, reported on the income statement as a single straight-line lease expense.

Right-of-Use (ROU) Asset

An asset recognized by a lessee at lease commencement, measured as the present value of required lease payments.

Short-Term Lease Shortcut

An accounting election for leases with a term of $12$ months or less where lessees recognize rent expense over the term without recording an ROU asset or liability.

Guaranteed Residual Value

A guarantee that the lessor will recover a specified residual amount at the end of a lease, where any expected shortfall is included in the lessee's lease liability.

Unguaranteed Residual Value

An expected residual value of a leased asset that is not guaranteed by the lessee and is excluded from the lessee's lease liability.

In-Substance Fixed Lease Payments

Payments that appear variable in contractual form but are effectively unavoidable, requiring inclusion in present value calculations.

Sales-Type Lease

A lessor lease classification where control of the underlying asset transfers to the lessee, replacing the underlying asset on the balance sheet with a lease receivable.

Callable Bond

A bond that gives the issuer the right to redeem the bond prior to its maturity date under specified contractual terms.

Mortgage Bond

A bond secured by a lien on specified real estate or property assets.

Present Value of $1$ Table

A rate table used to calculate the present value of a single future cash payment at a specified interest rate and period count ($n$).

Present Value of an Ordinary Annuity of $1$ Table

A rate table used to determine the current value of a series of equal cash payments occurring at the end of each period.

Present Value of an Annuity Due of $1$ Table

A rate table used to determine the current value of a series of equal cash payments occurring at the beginning of each period.