Jamona Corp
Restructuring Debt Scenario
Understanding the current reporting requirements for long-term liabilities is critical when making the decision to make sacrifices for future economic benefits. Specifically these long term liabilities consist of bonds, mortgages, capital leases, as well as other types of debt.
Bonds are one type of long-term liability, which are traditionally valued at the present value of the bonds expected future cash flows, which are made up of both interest and principal. Bonds can be issued at face value, which is typically referred to as par in the investment community, or they are issued at a discount or premium. In the event bonds are issued at par, the company records the cash proceeds and the face value of the bonds at issuance and records accrued interest expense at the end of the period. If bonds are not issued at par and are instead issued at a discount or premium, companies amortize the discount or premium and charge it to interest over the term the bonds are outstanding. The method commonly used for amortization of the discount or premium is often referred to as the effective interest method. Under the effective interest method, “a periodic interest expense is produced equal to a constant percentage of the carrying value of the bonds” (Kieso, Weygandt, & Warfield, 2007). Companies may either use the effective-interest or straight-line method to amortize the interest expense over the life of the bonds because they result in the same expense over the term of the bonds. These methods can vary annually, and when material, generally accepted accounting principles (GAAP) require the use of the effective interest method (Kieso, Weygandt, & Warfield, 2007).
Mortgage note payables are a second form of long-term liability, and are perhaps the most common type of long-term liability. A mortgage note payable, “is a promissory note secured by a document called a mortgage that pledges title to property as security for the loan” (Kieso,
Understanding the current reporting requirements for long-term liabilities is critical when making the decision to make sacrifices for future economic benefits. Specifically these long term liabilities consist of bonds, mortgages, capital leases, as well as other types of debt.
Bonds are one type of long-term liability, which are traditionally valued at the present value of the bonds expected future cash flows, which are made up of both interest and principal. Bonds can be issued at face value, which is typically referred to as par in the investment community, or they are issued at a discount or premium. In the event bonds are issued at par, the company records the cash proceeds and the face value of the bonds at issuance and records accrued interest expense at the end of the period. If bonds are not issued at par and are instead issued at a discount or premium, companies amortize the discount or premium and charge it to interest over the term the bonds are outstanding. The method commonly used for amortization of the discount or premium is often referred to as the effective interest method. Under the effective interest method, “a periodic interest expense is produced equal to a constant percentage of the carrying value of the bonds” (Kieso, Weygandt, & Warfield, 2007). Companies may either use the effective-interest or straight-line method to amortize the interest expense over the life of the bonds because they result in the same expense over the term of the bonds. These methods can vary annually, and when material, generally accepted accounting principles (GAAP) require the use of the effective interest method (Kieso, Weygandt, & Warfield, 2007).
Mortgage note payables are a second form of long-term liability, and are perhaps the most common type of long-term liability. A mortgage note payable, “is a promissory note secured by a document called a mortgage that pledges title to property as security for the loan” (Kieso,