Definition
Long-term debt (or long-term liability) refers to loans and other forms of debt that are not due within the next 12 months. These financial obligations require periodic interest payments and a final principal payment upon maturity. Common examples include bonds, notes payable, and long-term lease obligations.
Examples
- Corporate Bonds: A company may issue bonds to raise money for long-term investments. These bonds usually have a maturity period of 10 years or more and require semi-annual interest payments.
- Mortgage Loans: Long-term loans used to finance real estate purchases where the loan term exceeds one year, often stretching to 15 or 30 years.
- Notes Payable: Promissory notes issued by a company with a maturity period beyond 12 months, often used for long-term financing.
Frequently Asked Questions
What qualifies as long-term debt?
Any financial obligation that extends beyond one year qualifies as long-term debt. Common forms include bonds, mortgages, and long-term leases.
How is long-term debt reported on financial statements?
Long-term debt is reported as a liability on a company’s balance sheet. It is typically divided between the portion due within the next year (current portion) and the remainder (non-current portion).
What is the impact of long-term debt on a company’s financial health?
Long-term debt can provide necessary capital for growth and expansion but also increases financial risk due to interest obligations and the requirement to repay the principal amount.
Related Terms
- Bond: A fixed income instrument representing a loan made by an investor to a borrower, typically corporate or governmental, with periodic interest payments and repayment of principal at maturity.
- Notes Payable: Written promises to pay a certain amount of money at future dates, used as long-term financing tools.
- Interest: The cost of borrowing money, typically expressed as an annual percentage rate.
- Principal: The initial size of a loan or the amount of financial debt, excluding interest.
Online References
Suggested Books for Further Studies
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- “Financial Accounting” by Walter T. Harrison Jr., Charles T. Horngren, and C. William Thomas
- “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
Fundamentals of Long-Term Debt: Accounting Basics Quiz
### What characterizes long-term debt?
- [ ] Debt due within one year
- [x] Debt due in more than one year
- [ ] Debt that does not accrue interest
- [ ] Debt that only businesses incur
> **Explanation:** Long-term debt refers to financial obligations that extend beyond a one-year period, typically including bonds and mortgage loans.
### What type of financial obligation includes long-term debt?
- [x] Mortgage loans
- [ ] Credit card debts
- [ ] Short-term loans
- [ ] Utility bills
> **Explanation:** Mortgage loans are a common type of long-term debt, generally spanning over more than one year, often 15 or 30 years.
### How is long-term debt presented on a balance sheet?
- [x] As a liability
- [ ] As an asset
- [ ] As revenue
- [ ] As equity
> **Explanation:** Long-term debt is recorded as a liability on a company's balance sheet, reflecting the company’s obligation to repay the amount in the future.
### Which of the following is a related term to long-term debt?
- [ ] Accounts receivable
- [ ] Inventory
- [x] Bonds
- [ ] Cash and cash equivalents
> **Explanation:** Bonds are a common form of long-term debt used by companies and governments to raise capital.
### How are interest payments on long-term debt categorized in financial statements?
- [x] As an expense
- [ ] As income
- [ ] As equity
- [ ] As a liability
> **Explanation:** Interest payments on long-term debt are recorded as an expense on the income statement, reflecting the cost of borrowing.
### What is principal in terms of long-term debt?
- [ ] The periodic interest payment
- [x] The original amount of the loan
- [ ] The total amount paid in interest
- [ ] The market value of the debt
> **Explanation:** The principal is the initial loan amount or the amount of financial debt that excludes any interest.
### Which entity often issues long-term debt in the form of bonds?
- [x] Corporations
- [ ] Homeowners
- [ ] Small businesses
- [ ] Individual customers
> **Explanation:** Corporations frequently issue bonds as a form of long-term debt to raise large amounts of capital.
### What is the purpose of a long-term lease in the context of long-term debt?
- [ ] To avoid any financial commitment
- [x] To secure the use of assets without immediate full payment
- [ ] To incur short-term liabilities
- [ ] To eliminate the need for loans
> **Explanation:** Long-term leases allow companies to use assets, such as buildings or equipment, without purchasing them outright, extending the liability over multiple years.
### Why might a company choose to incur long-term debt?
- [ ] To immediately increase its liability
- [x] To finance significant investments or expansion
- [ ] To reduce its debt-to-equity ratio
- [ ] To lower its interest expenses
> **Explanation:** Companies incur long-term debt to finance large investments, such as new projects, acquisitions, or capital improvements, enabling growth and expansion.
### Regarding long-term debt, what is the usual frequency of interest payments?
- [x] Periodic, such as semi-annually or annually
- [ ] Daily
- [ ] Weekly
- [ ] Monthly
> **Explanation:** Interest on long-term debt is typically paid on a periodic basis, which can be semi-annual or annual, depending on the debt agreement.
Thank you for exploring the essentials of long-term debt with us. Continue your studies and expand your knowledge to succeed in the world of accounting and finance!
