When you have something listed in the category of current liabilities, it is you
ID: 2351404 • Letter: W
Question
When you have something listed in the category of current liabilities, it is your intention to pay the obligation sometime within the next 12 months. However, is something is listed as a long-term liability; you have no idea whether it is due to be paid within 2 years or 20 years. Do you think it would be helpful if long-term liabilities were separated into different categories such as "obligations within the next 5 years," "obligations within the next 10 years," "obligations longer than 10 years," and so on?A listing of bonds in order of dates of maturity would provide a schedule of when obligations are due. How could you use such a list?
What circumstances did we learn in class that could cause a bond issue to be paid before its maturity date?
Explanation / Answer
Zero Coupon Bonds are issued at a discount and mature at Par ($1,000). The value of the bond increases mathematically by a slight amount every day during the life of the bond. The mathematical value of the bond on a given day is its accreted value (or accumulated value to date). Note that the accreted value may be higher or lower than the market value of the bond. n addition to calculating regular income tax, taxpayers are also required to calculate tax liability using the AMT method. The taxpayer then pays the higher of the tax calculated by the two methods. Some municipal bonds are subject to AMT, meaning that if you pay AMT, the interest earned on these bonds is taxable under the AMT calculation. Other municipal bonds are not subject to AMT, meaning that even if you pay taxes using the AMT method, interest from non-AMT municipals will not be taxable. Please consult your tax advisor for complete details, and how you might be affected by buying municipal bonds that are subject to AMT.
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