Short term liabilities consist of an expected outflow of resources arising from present obligations that are not payable within a year or the operating cycle of the company whichever is longer.

External financing includes some combination of debt and equity financing. Corporations obtain cash for recurring business operations from stock issuances, profitable operations, and short-term borrowing (current liabilities). However, when situations arise that require large amounts of cash, such as the purchase of a land, building, or equipment, corporations also raise cash from longterm borrowing (obligations arising from debt financing is called as “long term liabilities”).

Long term liabilities consist of an expected outflow of resources arising from present obligations that are not payable within a year or the operating cycle of the company whichever is longer.

Bond is a form of interest-bearing notes payable issued by corporations and governmental agencies. A bond is a debt or liability of the issuer.

The bond indenture is a contract or loan agreement under which the bonds are issued. A bond indenture deals with matters such as the interest rate, maturity date and maturity amount, possible restrictions on dividends, repayment plans, and other provisions relating to the debt. A bond indenture represents a promise to pay:
1. a sum of money at a designated maturity rate, plus
2. periodic interest at a specified rate on the maturity amount (face value)

The interest rate written in terms of the bond indenture is known as the stated interest rate.Stated interest rate is also called as coupon or nominal rate. The interest rate written in terms of the bond indenture is set by the bond issuer.

Secured bonds are backed by a pledge of some collaterals, unsecured bonds are not.Unsecured bonds offer high interest rate, they are not backed by a collateral and very risky.

With respect to the way they mature, bonds are classified as term bonds, serial bonds and callable bonds. Bond issues that mature on a single date are called “term bonds”. Bond issues that mature in installments are called “serial bonds”. Bond issues that give the issuer the right to call and retire the bonds prior to maturity is called “callable bonds”.

Bonds issued in the name of the owner are called registered bonds, bonds not issued in the name of the owner are called bearer (coupon) bonds.

Bonds which pay interest from the profit of issuing company are called “income bonds”, bonds which pay interest from specified revenue sources are called “revenue bonds”

If stated interest rate is different from the market interest rate then bonds will be sold at a price different from their face value, because company is offering a different return from what the market is offering. So we can say bond is either sold at a premium or a discount.

The method used for amortization of a discount or premium is called effective interest method.

Bond Interest Expense = Carrying Value of Bonds x Effective Interest Rate at The Beginning of Period

Bond Interest Paid = Face Amount of Bonds x Stated Interest Rate
Amortization Amount = Bond Interest Expense – Bond Interest Paid

A long-term note is a promissory note that represents a loan from a bank or other creditor. Long-term notes payable is similar to short-term notes payable except that the term of the notes exceeds one year. The basic difference between short term notes payable and long-term notes payable is the maturity date. As we have already mentioned before long term liabilities consist of an expected outflow of resources arising from present obligations that are not payable within a year or the operating cycle of the company whichever is longer. Long-term notes payable is typically reported in the long-term liabilities section of the balance sheet.

Installment notes are generally used to purchase specific assets such as equipment, and typically secured by the purchased asset. When a note is secured by an asset, it is called a mortgage note.

If the borrower cannot pay the mortgage note, the lender has the right to take ownership of the pledged asset and sell it to pay back the debt. Mortgages payable are very similar to long-term notes payable. The main difference is the mortgages payable is secured with specific assets, whereas long-term notes are not secured with specific assets.

The nature of long term notes payable is quite similar in substance to bonds. A long- erm note is a promissory note that represents a loan from a bank or other creditor, while a bond is usually a more complex financial instrument that represent a debt to many creditors.10 Additionally, notes do not trade as readily as bonds in the organized public securities markets.

Interest expense: Beginning Balance × Interest Rate × Time

Amortization of a discount increases bond interest expense, amortization of a premium decreases bond interest expense.