There is a need to control the accounting procedures when it comes to bonds and long-term notes. Even though both are methods of acquiring capital for a company, there is a slight difference in the way the company handles the two sources of capital. The process employed is a requirement by the CALSTARS accounts for bond and the State Controller’s Office, which commonly referred to as (SCO). However, no matter the type of procedures used, the process must be in line with the Generally Accepted Accounting Principles.
The State Controller’s Office dictates the procedure that all bonds and long-term notes will take. They do this by having a number of sub-funds such as the use of Pre-Tax Reform Act, Post-Tax Reform Act, and PMIA. Every bond is known to apply one of these procedures where each procedure is known to employ a specific method.
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The general procedure is known to have three steps where the first step is to set the current book values of all the loans as present value. The second step is to use the new payment streams and the current books to calculate the new rates on the loan. Finally use these rates to calculate interests, as they are the only effective rates. Long-term notes is also known to employ the same procedure as it involves all those debts that will need to be paid in a p of more than one year.
However, the main difference is that while bonds are known to use the present value figure of the company, calculation of long-term notes is known to put in use the financial history of the company. A good example of a bond is a premium bond of a company which requires to solicit ate a capital of $ 10 million in 200 bonds such a company may sell premium bonds of $50,000 each. An example of long-term notes is a case of a company that has a loan of $2 million where it must pay $500,000 after every one and half years.
A long-term note is a term used to refer to all those debts that takes more than one year to mature. This period is calculated from the date that is indicated in the balance sheet. It is the requirement of the Generally Accepted Accounting Principles to present all the long-term debts but in two parts. The first one is all those long-term debts that are payable within one year and they are presented in the current liabilities section. Then there are those others that remain after this deduction, and they are presented in the long-term liabilities section. All these information should be available as they help those potential investors to the company to calculate the risk exposure of the company through the calculation of long-term debts to capitalization ratio.
Apart from these, some other disclosures, that the Generally Accepted Accounting Principles requires of a long-term note is the recording of all the additional information concerning debts that is in the notes to the financial statement. Such information that needs disclosure are the terms of the notes, all the interests rates that will be applied and the amount of principal that the organization will have to pay in the next five years from the time that is indicated in the balance sheet.
These disclosures are known to assist all those financial users to make the best decisions concerning the plans and obligations of the company in the future. With this information, an investor will be able to gauge whether he or she should invest into the company or whether investing there is a risky venture. This discloser also helps the company to know whether there is a chance of survival in the future or whether the future is very risky.
Stickney, R. (2009). Financial Accounting: An Introduction to Concepts, Methods & Uses. New York: Cengage Learning.
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