ACCT 2015

Intermediate Financial Accounting II

Unit 4 – Non- Current Liabilities (Long term)
PART 1
 Objectives:

✓Describe the formal procedures associated with issuing long-term

debt.
✓Identify various types of bond issues.
✓Describe the accounting valuation for bonds at date of issuance.
✓Apply the methods of bond discount and premium amortization.
✓Explain the accounting for long-term notes payable.
✓Describe the accounting for the extinguishment of non-current
liabilities.
✓Describe the accounting for the fair value option.
✓Explain the reporting of off-balance-sheet financing arrangements.
✓Indicate how to present and analyze non-current liabilities.
Section 1

BONDS PAYABLE
What are non-current liabilities?

Non-current liabilities are long-term financial obligations that are not

due within the present accounting year, such as long-term borrowing,
bonds payable, pension liabilities and long-term lease obligations.
What are bonds payable?

✓A form of long term debt.

✓Issued by corporations, hospitals, and governments.
✓The issuer makes formal promises to pay interest usually every
six months (semiannually)
✓The principal or maturity amount will be paid at a specified
date many years in the future.
✓The agreement covering the details of the bonds payable is
known as the bond's indenture.
Types of bonds

✓Secured and Unsecured bonds

✓Term, serial bonds and callable bonds
✓Convertible, commodity backed and deep discount bonds
Valuation of Bonds Payable

• The investment community values a bond at the present value of its

expected future cash flows, which consist of (1) interest and (2)
principal.

• Selling Price of bond = Present value of principal + present value of

interest payments.
Valuation of Bonds Payable Cont’d

• The interest rate written in the terms of the bond indenture is

known as the stated, coupon, or nominal rate.
• The issuer of the bonds sets this rate.
• The rate of interest actually earned by the bondholders is called
the effective yield or market rate.
• If the rate employed by the investment community (buyers)
differs from the stated rate, the present value of the bonds
computed by the buyers (and the current purchase price) will
differ from the face value of the bonds.
Valuation of Bonds Payable Cont’d

• The difference between the face value and the present value of
the bonds determine the actual price that buyers pay for the
bonds.
• This difference is either a discount or premium.
✓If the bonds sell for less than face value, they sell at a discount. (market
rate > stated rate)
✓If the bonds sell for more than face value, they sell at a premium. (market
rate < stated rate)
✓If the market rate = stated rate. The bond is selling at par.
Valuation of Bonds Payable Cont’d

• To calculate the amount of interest that is paid to the bondholder

each period:
Stated rate x Face Value of the bond

• To calculate the amount of interest that is recorded as interest

expense by the issuer of the bonds:
Market rate x Carrying Value of the bond
Valuation of Bonds Payable Example

Dayne Corporation issued $100,000 of 8% long term bonds on January

1, 2011 due on January 1, 2016 with interest payable each July 1 and
January 1.
The investors require an effective interest rate of 10%.
They paid the company $92,278 for the bond.
(a) Calculate the selling price of the bond.
(b) Prepare a bond amortization schedule for the 5 years. Be sure to
clearly show the semiannual interest payments.
Valuation of Bonds Payable Example - Solution

(a) Calculate the selling price of the bond.

Maturity value of the bond
$100,000.00
PV. of face value ($100,000 x PVF i=5%;n=10) (100,000 x 0.61391) 61,391.00
PV of interest ($4,000 x PVFOA i=5%;n=10) (4,000 x 7.72173) 30,887.00
Proceeds from sale of bonds
($92,278.00)
Discount on bonds payable
$ 7,722.00

The bond was sold at a discount: (market rate > stated rate)
Valuation of Bonds Payable Example - Solution

(b) Bond Amortization schedule for the 5 years

Valuation of Bonds Payable Example - Solution

Journal entries to show:

(i) The issuance of the bond on January 1, 2011

Jan. 1, 2011
Cash $92,278
Bonds payable $92,278
Valuation of Bonds Payable Example - Solution

Journal entries to show:

(ii) Interest payments on July 1, 2011
Jul. 1, 2011
Bond interest expense $4614
Bonds payable $ 614
Cash $4000
Valuation of Bonds Payable Example - Solution

Journal entries to show:

(iii) Interest payments on December 31, 2011
Dec. 31, 2011
Bond interest expense $4645
Bond interest payable $4000
Bonds payable $
645
Accruing Interest

Where accruing interest are concerned, the company should prorate

the amount by the appropriate number of months to arrive at the
correct interest expense.
Bonds issued between interest dates

• Buyers will pay the seller the interest accrued from the last interest
payment date to the date of issue.

• On the next semiannual interest payment date, purchasers will

receive the full six months’ interest payment.