PRIN OF ACCT I Chapter 10 Accounting for Long-Term Liabilities Vocab

Bearer bonds

Bonds made payable to whoever holds them (the bearer); also called unregistered bonds.

Bond

Written promise to pay the bond's par (or face) value and interest at a stated contract rate; often issued in denominations of $1,000.

Bond certificate

Document containing bond specifics such as issuer's name, bond par value, contract interest rate, and maturity date.

Bond indenture

Contract between the bond issuer and the bondholders; identifies the parties' rights and obligations.

Callable bonds

Bonds that give the issuer the option to retire them at a stated amount prior to maturity.

Carrying (book) value of bonds

Net amount at which bonds are reported on the balance sheet; equals the par value of the bonds less any unamortized discount or plus any unamortized premium; also called carrying amount or book value.

Contract rate

Interest rate specified in a bond indenture (or note); multiplied by the par value to determine the interest paid each period; also called coupon rate, stated rate, or nominal rate.

Convertible bonds

Bonds that bondholders can exchange for a set number of the issuer's shares.

Coupon bonds

Bonds with interest coupons attached to their certificates; bondholders detach coupons when they mature and present them to a bank or broker for collection.

Debt-to-equity ratio

Defined as total liabilities divided by total equity; shows the proportion of a company financed by nonowners (creditors) in comparison with that financed by owners.

Discount on bonds payable

Difference between a bond's par value and its lower issue price or carrying value; occurs when the contract rate is less than the market rate.

Effective interest method

Allocates interest expense over the bond life to yield a constant rate of interest; interest expense for a period is found by multiplying the balance of the liability at the beginning of the period by the bond market rate at issuance; also called interest method.

Finance lease

Long-term lease where the lessee receives substantially all remaining benefits of the asset (one or more of five criteria must be met); a finance lease is similar to the financing of an asset purchase.

Greenwashing

An organization's release of deceptive or misleading statements for purposes of making that organization appear more environmentally responsible than it is.

Installment note

Liability requiring a series of periodic payments to the lender.

Lease

Contract specifying the rental of property.

Market rate

Interest rate that borrowers are willing to pay and lenders are willing to accept for a specific lending agreement given the borrowers' risk level.

Mortgage

Legal loan agreement that protects a lender by giving the lender the right to be paid from the cash proceeds from the sale of a borrower's assets identified in the mortgage.

Operating lease

Short-term (or cancelable) lease in which the lessor retains risks and rewards of ownership.

Par value of a bond

Amount the bond issuer agrees to pay at maturity and the amount on which cash interest payments are based; also called face amount or face value of a bond.

Pension plan

Contractual agreement between an employer and its employees for the employer to provide benefits to employees after they retire; expensed when incurred.

Premium on bonds

Difference between a bond's par value and its higher carrying value; occurs when the contract rate is higher than the market rate; also called bond premium.

Registered bonds

Bonds owned by investors whose names and addresses are recorded by the issuer; interest payments are made to the registered owners.

Secured bonds

Bonds that have specific assets of the issuer pledged as collateral.

Serial bonds

Bonds consisting of separate amounts that mature at different dates.

Short-term lease

Lease with a term of 12 months or less that does not have a long-term purchase option; the lessee records such lease payments as expenses.

Sinking fund bonds

Bonds that require the issuer to make deposits to a separate account; bondholders are repaid at maturity from that account.

Straight-line bond amortization

Method allocating an equal amount of bond interest expense to each period of the bond life.

Term bonds

Bonds scheduled for payment (maturity) at a single specified date.

Unsecured bonds

Bonds backed only by the issuer's credit standing; almost always riskier than secured bonds; also called debentures.