Power Point 15

LongLong-Term Liabilities
Chapter 15
Copyright 2007 Prentice-Hall. All rights reserved
Objective 1
Account for bonds payable
Bonds: An Introduction
Groups of notes payable issued to multiple lenders Principal (maturity value, par value) Maturity date Stated interest rate
Types of Bonds
Term bonds - mature at a single specified future date Serial bonds - mature in installments
Types of Bonds
Secured bonds - specific assets are pledged as collateral Debenture bonds - backed by the good faith of the issuer
Bond Prices
Maturity value (par) Discount Premium
Bond Prices
Quoted as percent of its face value What is the issue price of a $1,000 bond sold at 98? $1,000 x .98 = $980 What is the issue price of a $5,000 bond sold at 101? $5,000 x 1.01 = $5,050
Copyright 2007 Prentice-Hall. All rights reserved 7
Present Value
Time value of money Amount a person would invest today to receive a greater amount in the future Difference between present value and future value = Interest
Yr 1 Present Value $97,000
Yr 2
Yr 3
Yr 4
Yr 5
Yr 6 Future Value $100,000

8
Bond Interest Rates

Stated interest rate
Printed on bond Determines cash interest payments
Market interest rate (effective rate)

Rate in effect when bonds are issued Rate investors demand for loaning money
Bond Interest Rates

Bond Stated Rate = 9%
Market Rate = 8% Bonds Sell at a Premium
Market Rate = 9% Bonds Sell At Par (Face)

Market Rate = 10% Bonds Sell at a Discount

10
Issuing Bonds at Par E15E15-17

GENERAL JOURNAL DATE DESCRIPTION REF DEBIT CREDIT
2006
Mar 31 Cash Bonds Payable Sep 30 Interest Expense Cash Dec 31 Interest Expense Interest Payable
400,000 400,000 14,000 14,000 7,000 7,000
Interest = 400,000 x .07 x = 14,000
Interest = 400,000 x .07 x 3/12 = 7,000

E15E15-17
2007
Mar 31 Interest Expense Interest Payable Cash
7,000 7,000 14,000
12
E15E15-18 a
Jan 1 Cash Bonds Payable Jul 1 Interest Expense Cash
50,000 50,000 1,500 1,500
Cash = $50,000 x 6% x = $1,500
13
Objective 2
Measure interest expense by the straight-line amortization method
14
Bond Discount E15-18 b E15GENERAL JOURNAL DATE DESCRIPTION REF DEBIT CREDIT
Jan 1 Cash Discount on Bonds Payable Bonds Payable
47,500 2,500 50,000
Contra-Liability Account
15
Balance Sheet Presentation as of January 1

Long-term liabilities: Bond payable Less Discount on Bonds
Face Value Carrying Value
$50,000 2,500 $47,500
16
StraightStraight-Line Amortization E15E15-18 b

Jan 1 Cash Discount on Bonds Payable Bonds Payable Jul
47,500 2,500 50,000
1 Interest Expense 125 Discount on Bonds Payable 125 Amortization of discount = $2,500 / 20 periods 1 Interest Expense 1,500 Cash 1,500 Cash = $50,000 x 6% x = $1,500
Balance Sheet Presentation

January 1 Long-term liabilities: Bond payable $50,000 Less Discount on Bonds 2,500 $ 47,500 July 1 Long-term liabilities: Bond payable $50,000 Less Discount on Bonds 2,375 $ 47,625
Notice that the carrying value of the bond increases, approaching the face value
Bond Premium E15-18 c E15GENERAL JOURNAL DATE DESCRIPTION REF DEBIT CREDIT
Jan 1 Cash Premium on Bonds Payable Bonds Payable
52,500 2,500 50,000
19
Balance Sheet Presentation as of January 1

Long-term liabilities: Bond payable Plus Premium on Bonds
Face Value Carrying Value
$50,000 2,500 $52,500
20
StraightStraight-Line Amortization E15E15-18 c

Jan 1 Cash Premium on Bonds Payable Bonds Payable Jul
52,500 2,500 50,000
1 Premium on Bonds Payable 125 Interest Expense Amortization of premium = $2,500 / 20 periods 125 1 Interest Expense Cash
1,500 1,500
21
Balance Sheet Presentation

January 1 Long-term liabilities: Bond payable $50,000 Plus Premium on Bonds 2,500 $52,500 July 1 Long-term liabilities: Bond payable $50,000 Plus Premium on Bonds 2,375 $52,375
Notice that the carrying value of the bond decreases, approaching the face value
Adjusting Entries
When bonds are issued at a discount or premium, accrual includes amortization
23
Issuing Bonds Payable Between Interest Dates

Bonds can be issued between interest payment dates
24
Exercise 15-21 15-
April 30 Bond Date
May 31 Issue Date
Oct 31 Interest Payment Date Corp. pays full 6 months of interest of $3,000
Investor pays face value + Accrued interest $100,000 + $500 ($100,000 x 6% x 1/12)
25
Exercise 15-21 15GENERAL JOURNAL DATE DESCRIPTION REF DEBIT CREDIT
May 31 Cash Bonds Payable Interest Payable Oct 31 Interest Expense Interest Payable Cash Interest payable = $100,000 x .06 x 1/12
100,500 100,000 500 2,500 500 3,000
26
Objective 3
Account for retirement and conversion of bonds payable
27
Bonds Features
Convertible bonds - bondholders can convert bonds into common stock Callable bonds
Corporation can call and retire bonds before maturity date Corporation usually pays a call price which is a few percentage points above par value
28
Retirement of Bonds Payable

To retire a bond early, issuer can
Purchase bonds in the open market Exercise a call option
29
Early Retirement of Bonds

Record interest expense and amortize discount or premium up to retirement date If carrying value of bond > cash paid = gain on early retirement of bonds If carrying value of bond < cash paid = loss on early retirement of bonds Gains or losses on early retirement of debt (if material in amount) are extraordinary items
30
E15E15-24
Bonds payable 200,000 200,000 x 12,000 x Carrying value of bonds Bonds payable 100,000 Less discount (6,000) 94,000 Discount on bonds 12,000
Cash paid to retire debt 100,000 x 1.01 = 101,000
Loss of 7,000
31
E15E15-24 (1)
Oct 1 Bonds Payable Loss on Retirement of Bonds Payable Discount on Bonds Payable Cash
100,000 7,000 6,000 101,000
32
Convertible Bonds
Holder has option of exchanging bond for specified number of shares of common stock When converted - stockholders equity increased by carrying amount of bonds converted
33
The bondholders would convert their bonds into stock when the market value of the stock to be received from GENERAL JOURNAL conversion exceeds the market value DATE DESCRIPTION of the bonds Oct 1 Bonds Payable Discount on Bonds Payable Common Stock Paid-in Capital in Excess of Par, Common
E15E15-24 (2)
REF DEBIT CREDIT
100,000 6,000 10,000 84,000
34
Objective 4
Report liabilities on the balance sheet
35
Reporting Liabilities
Current:
Interest Payable Current portions of long-term liabilities
Long-term:
Mortgage Payable Capital Lease Payable Bonds Payable
36
Exercise 15-25 15Current liabilities: Accounts payable.$ 50,000 Bonds payable, current 20,000 Salary payable.. 10,000 Income tax payable.. 8,000 Interest payable.... 7,000 Total current liabilities $95,000 Long-term liabilities: Bonds payable.... $180,000
37
Objective 5
Show the advantages and disadvantages of borrowing
38
Advantages of Bonds
Do not affect stockholder control Interest on bonds is tax deductible Can increase return on equity
39
Disadvantages of Bonds
Require payment of both periodic interest and par value at maturity Can decrease return on equity when company pays more in interest than it earns on the borrowed funds
40
End of Chapter 15
41

Power Point 15

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Power Point 15

Uploaded by

Copyright:

Available Formats

LongLong-Term Liabilities

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Yr 6 Future Value $100,000

Bond Interest Rates

Market interest rate (effective rate)

Copyright 2007 Prentice-Hall. All rights reserved

Bond Interest Rates

Market Rate = 8% Bonds Sell at a Premium

Market Rate = 9% Bonds Sell At Par (Face)

Market Rate = 10% Bonds Sell at a Discount

Issuing Bonds at Par E15E15-17

400,000 400,000 14,000 14,000 7,000 7,000

Interest = 400,000 x .07 x = 14,000

Interest = 400,000 x .07 x 3/12 = 7,000

Mar 31 Interest Expense Interest Payable Cash

7,000 7,000 14,000

Copyright 2007 Prentice-Hall. All rights reserved

Jan 1 Cash Bonds Payable Jul 1 Interest Expense Cash

50,000 50,000 1,500 1,500

Cash = $50,000 x 6% x = $1,500

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Jan 1 Cash Discount on Bonds Payable Bonds Payable

47,500 2,500 50,000

Copyright 2007 Prentice-Hall. All rights reserved

Balance Sheet Presentation as of January 1

$50,000 2,500 $47,500

Copyright 2007 Prentice-Hall. All rights reserved

StraightStraight-Line Amortization E15E15-18 b

Jan 1 Cash Discount on Bonds Payable Bonds Payable Jul

47,500 2,500 50,000

Balance Sheet Presentation

Jan 1 Cash Premium on Bonds Payable Bonds Payable

52,500 2,500 50,000

Copyright 2007 Prentice-Hall. All rights reserved

Balance Sheet Presentation as of January 1

$50,000 2,500 $52,500

Copyright 2007 Prentice-Hall. All rights reserved

StraightStraight-Line Amortization E15E15-18 c

Jan 1 Cash Premium on Bonds Payable Bonds Payable Jul

52,500 2,500 50,000

Balance Sheet Presentation

Copyright 2007 Prentice-Hall. All rights reserved

Issuing Bonds Payable Between Interest Dates

Copyright 2007 Prentice-Hall. All rights reserved

Exercise 15-21 15-

April 30 Bond Date

May 31 Issue Date

Copyright 2007 Prentice-Hall. All rights reserved

Exercise 15-21 15GENERAL JOURNAL DATE DESCRIPTION REF DEBIT CREDIT

100,500 100,000 500 2,500 500 3,000

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Retirement of Bonds Payable

Copyright 2007 Prentice-Hall. All rights reserved

Early Retirement of Bonds

Copyright 2007 Prentice-Hall. All rights reserved