Chapter Review

Key Takeaways

• Long-term liabilities mature after one year or the operating cycle.
• Common long-term liabilities include bonds, notes, mortgages, leases, pensions, and asset retirement obligations.
• Bonds represent long-term borrowing from investors.
• Bond prices depend on the relationship between coupon and market interest rates.
• Bonds may be issued at par, premium, or discount.
• Bond issue prices equal the present value of future cash flows.
• The effective interest method is the preferred approach for premium and discount amortization.
• Bond carrying amount changes as premiums and discounts are amortized.
• Early debt extinguishment may result in gains or losses.
• Debt covenants impose contractual restrictions on borrowers.
• Leverage ratios evaluate a company's ability to manage long-term obligations.

Every bond tells a financing story—the issue price reflects today's value of tomorrow's promised cash flows.