Professional Documents
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Pertemuan 01 Dan 02 (Bab 14)
Pertemuan 01 Dan 02 (Bab 14)
Coby Harmon
University of California, Santa Barbara
Westmont College
14-1
Non-Current CHAPTER 14
Liabilities
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe the nature of bonds and 3. Explain the accounting for the
indicate the accounting for bond extinguishment of non-current
issuances. liabilities.
2. Explain the accounting for long- 4. Indicate how to present and
term notes payable. analyze non-current liabilities.
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PREVIEW OF CHAPTER 14
Intermediate Accounting
IFRS 3rd Edition
Kieso ● Weygandt ● Warfield
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LEARNING OBJECTIVE 1
Bonds Payable Describe the nature of bonds
and indicate the accounting for
bond issuances.
Examples:
► Bonds payable ► Pension liabilities
► Long-term notes payable ► Lease liabilities
► Mortgages payable
Long-term debt has various
covenants or restrictions.
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Types of Bonds
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Issuing Bonds
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What Do the Numbers Mean?
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Valuation and Accounting for Bonds
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Valuation and Accounting for Bonds
(2) principal.
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Valuation and Accounting for Bonds
Interest Rate
Stated, coupon, or nominal rate = Rate written in the
terms of the bond indenture.
► Bond issuer sets this rate.
► Stated as a percentage of bond face value (par).
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Valuation and Accounting for Bonds
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Valuation and Accounting for Bonds
Assume Stated Rate of 8%
6% Premium
8% Par Value
10% Discount
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Bonds Issued at Par
ILLUSTRATION 14.1
Time Diagram for Bonds Issued at Par
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Bonds Issued at Par ILLUSTRATION 14.1
Time Diagram for Bonds
Issued at Par
ILLUSTRATION 14.2
Present Value
Computation of
Bond Selling at Par
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Bonds Issued at Par
Cash 100,000
Bonds payable 100,000
ILLUSTRATION 14.3
Time Diagram for Bonds Issued at a Discount
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Bonds Issued at a Discount ILLUSTRATION 14.3
Time Diagram for Bonds
Issued at a Discount
ILLUSTRATION 14.4
Present Value
Computation of
Bond Selling at
Discount
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Bonds Issued at a Discount
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Bonds Issued at a Discount
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Effective-Interest Method
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Effective-Interest Method
ILLUSTRATION 14.5
Bond Discount and Premium Amortization Computation
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Effective-Interest Method
ILLUSTRATION 14.6
Computation of Discount on Bonds Payable
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Effective-Interest Method
TABLE 6.2 PRESENT VALUE OF 1 (PRESENT VALUE OF A SINGLE SUM)
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ILLUSTRATION 14.7
Bond Discount
Amortization Schedule
Cash 92,278
Bonds Payable 92,278
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ILLUSTRATION 14.7
Bond Discount
Amortization Schedule
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ILLUSTRATION 14.7
Bond Discount
Amortization Schedule
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Effective-Interest Method
ILLUSTRATION 14.8
Computation of Premium on Bonds Payable
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Effective-Interest Method
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ILLUSTRATION 14.9
Bond Premium
Amortization Schedule
Cash 108,530
Bonds Payable 108,530
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ILLUSTRATION 14.9
Bond Premium
Amortization Schedule
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Effective-Interest Method
Accrued Interest
What happens if Evermaster prepares financial statements at the
end of February 2019? In this case, the company prorates the
premium by the appropriate number of months to arrive at the
proper interest expense, as follows.
ILLUSTRATION 14.10
Computation of Interest Expense
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Effective-Interest Method
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Effective-Interest Method
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Effective-Interest Method
Cash 100,000
Bonds payable 100,000
Cash 2,667
Interest expense 2,667
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Effective-Interest Method
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Effective-Interest Method
Cash 108,039
Bonds payable 108,039
Cash 2,667
Interest expense 2,667
(€100,000 x .08 x 4/12) = €2,667
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Effective-Interest Method
ILLUSTRATION 14.12
Partial Period Interest Amortization
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Effective-Interest Method
ILLUSTRATION 14.13
Partial Period Interest Amortization
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Effective-Interest Method
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Notes Issued at Face Value
Cash 10,000
Notes Payable 10,000
Zero-Interest-Bearing Notes
Issuing company records the difference between the face
amount and the present value (cash received) as
a discount and
amortizes that amount to interest expense over the life
of the note.
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Zero-Interest-Bearing Notes
ILLUSTRATION 14.14
Time Diagram for Zero-Interest Note
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Zero-Interest-Bearing Notes
Cash 7,721.80
Notes Payable 7,721.80
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ILLUSTRATION 14.15
Schedule of Note
Turtle Cove records interest expense at Discount Amortization
ILLUSTRATION 7-16
Computation of
Present Value—
Effective Rate
Different from
Stated Rate
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Interest-Bearing Notes
Cash 9,520
Notes Payable 9,520
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ILLUSTRATION 14.16
Schedule of Note
Discount Amortization
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Special Notes Payable Situations
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Special Notes Payable Situations ILLUSTRATION 14.18
Time Diagram for
Interest-Bearing Note
ILLUSTRATION 14.19
Computation of Imputed Fair Value and Note Discount
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Special Notes Payable Situations
ILLUSTRATION 14.19
Computation of Imputed Fair Value and Note Discount
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ILLUSTRATION 14.20
Schedule of Discount
Amortization Using
Imputed Interest Rate
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Extinguishment of LEARNING OBJECTIVE 3
Non-Current Explain the accounting for
extinguishment of non-
Liabilities current liabilities.
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Extinguishment of Non-Current Liabilities
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Extinguishment with Cash before Maturity
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Extinguishment with Cash before Maturity
Two years after the issue date on January 1, 2021, Evermaster calls
the entire issue at 101 and cancels it.
ILLUSTRATION 14.22
Computation of Loss on Redemption of Bonds
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Transfer of Assets
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Granting of Equity Interest
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Extinguishment of Non-Current Liabilities
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Modification of Terms
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Modification of Terms
ILLUSTRATION 14.23
Fair Value of Restructured Note
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Modification of Terms
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ILLUSTRATION 14.24
Schedule of Interest and
Amortization after Debt
Modification
Resorts Development recognizes interest expense
on this note using the effective rate of 15 percent. Thus, on
December 31, 2020 (date of first interest payment after restructure),
Resorts Development makes the following entry.
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ILLUSTRATION 14.24
Schedule of Interest and
Amortization after Debt
Modification
Resorts Development makes a similar entry
(except for different amounts for credits to Notes Payable and debits
to Interest Expense) each year until maturity. At maturity, Resorts
Development makes the following entry.
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LEARNING OBJECTIVE 4
Presentation and Analysis Indicate how to present and
analyze non-current
liabilities.
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Fair Value Option
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Off-Balance-Sheet Financing
Different Forms:
► Non-Consolidated Subsidiary
► Special Purpose Entity (SPE)
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Off-Balance-Sheet Financing
Rationale
► Removing debt enhances the quality of the balance sheet
and permits credit to be obtained more readily and at less
cost.
► Loan covenants often limit the amount of debt a company
may have. These types of commitments might not be
considered in computing the debt limitation.
► Some argue that the asset side of the balance sheet is
severely understated.
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Presentation and Analysis
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Presentation and Analysis
Total Liabilities
Debt to Assets =
Total Assets
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Presentation and Analysis
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Presentation and Analysis
ILLUSTRATION 14.28
Computation of Long-Term Debt Ratios for Novartis
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GLOBAL ACCOUNTING INSIGHTS
LEARNING OBJECTIVE 5
Compare the accounting for liabilities under IFRS and U.S. GAAP.
U.S. GAAP and IFRS have similar definitions for liabilities. In addition, the
accounting for current liabilities is essentially the same under both IFRS and
U.S. GAAP. However, there are substantial differences in terminology related
to noncurrent liabilities as well as some differences in the accounting for
various types of long-term debt transactions.
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GLOBAL ACCOUNTING INSIGHTS
Relevant Facts
Similarities
• U.S. GAAP and IFRS have similar liability definitions. Both also classify
liabilities as current and non-current.
• Much of the accounting for bonds and long-term notes is the same under
U.S. GAAP and IFRS.
• Under U.S. GAAP and IFRS, bond issue costs are netted against the
carrying amount of the bonds.
• Both U.S. GAAP and IFRS require the best estimate of a probable loss. In
U.S. GAAP, the minimum amount in a range is used. Under IFRS, if a range
of estimates is predicted and no amount in the range is more likely than any
other amount in the range, the midpoint of the range is used to measure the
liability.
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GLOBAL ACCOUNTING INSIGHTS
Relevant Facts
Similarities
• Both U.S. GAAP and IFRS prohibit the recognition of liabilities for future
losses.
Differences
• Under U.S. GAAP, companies must classify a refinancing as current only if it
is completed before the financial statements are issued. IFRS requires that
the current portion of long-term debt be classified as current unless an
agreement to refinance on a long-term basis is completed before the
reporting date.
• U.S. GAAP uses the term contingency in a different way than IFRS. A
contingency under U.S. GAAP may be reported as a liability under certain
situations. IFRS does not permit a contingency to be recorded as a liability.
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GLOBAL ACCOUNTING INSIGHTS
Relevant Facts
Differences
• U.S. GAAP uses the term estimated liabilities to discuss various liability
items that have some uncertainty related to timing or amount. IFRS
generally uses the term provisions.
• U.S. GAAP and IFRS are similar in the treatment of environmental liabilities.
However, the recognition criteria for environmental liabilities are more
stringent under U.S. GAAP: Environmental liabilities are not recognized
unless there is a present legal obligation and the fair value of the obligation
can be reasonably estimated.
• U.S. GAAP uses the term troubled debt restructurings and develops
recognition rules related to this category. IFRS generally assumes that all
restructurings should be considered extinguishments of debt.
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GLOBAL ACCOUNTING INSIGHTS
Relevant Facts
Differences
• Under U.S. GAAP, companies are permitted to use the straight-line method
of amortization for bond discount or premium, provided that the amount
recorded is not materially different than that resulting from effective-interest
amortization. However, the effective-interest method is preferred and is
generally used. Under IFRS, companies must use the effective-interest
method.
• Under U.S. GAAP, companies record discounts and premiums in separate
accounts (see the About the Numbers section). Under IFRS, companies do
not use premium or discount accounts but instead show the bond at its net
amount.
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GLOBAL ACCOUNTING INSIGHTS
Relevant Facts
Differences
• Under U.S. GAAP, losses on onerous contract are generally not recognized
unless addressed by industry- or transaction-specific requirements. IFRS
requires a liability and related expense or cost be recognized when a
contract is onerous.
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GLOBAL ACCOUNTING INSIGHTS
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GLOBAL ACCOUNTING INSIGHTS
On the Horizon
As indicated in Chapter 2, the IASB and FASB are working on a conceptual
framework project, part of which will examine the definition of a liability. In
addition, the two Boards are attempting to clarify the accounting related to
provisions and related contingencies. The FASB has a project that will align the
classification of debt to be refinanced in a manner similar to IFRS.
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