CH 11

Financial Accounting
IFRS 4th Edition

Weygandt ● Kimmel ● Kieso
Chapter 11
Non-Current Liabilities
Financial Accounting
IFRS 4th Edition
Weygandt ● Kimmel ● Kieso
Lecturer: Nguyen Thi Thanh Loan

Mobilephone: 0973223988
Email: loanntt@ftu.edu.vn
Chapter Outline
Learning Objectives
LO 1 Describe the major characteristics of bonds.
LO 2 Explain how to account for bond transactions.
LO 3 Explain how to account for other non-current
liabilities.
LO 2 Discuss how non-current liabilities are reported
and analyzed.
Copyright ©2019 John Wiley & Sons, Inc. 3

Learning Objective 1
Describe the Major Characteristics of
Bonds

Overview of Bonds
- Bonds are a form of interest-bearing notes payable
issued by corporations, universities, and governmental
agencies.
- Sold in small denominations (usually $1,000 or multiples
of $1,000) => attract investors.
- When a company (issuer) issues bonds, it is borrowing
money. The person who buys the bonds (the bondholder)
is lending money or investing in bonds.

Types of Bonds (1 of 2)
Secured and Unsecured Bonds
• Secured bonds have specific assets of issuer pledged as
collateral for bonds. Eg. Mortgage bond, sinking fund bond
• Unsecured bonds (debenture bond) are issued against
general credit of borrower
Convertible and Callable Bonds
• Convertible bonds can be converted into ordinary shares at
bondholder’s option
• Callable bonds can be redeemed (bought back), by issuing
company, at a stated dollar amount prior to maturity

Issuing Procedures (1 of 3)
• Governmental laws grant corporations power to issue
bonds
• Both BOD and shareholders must approve bond issues
• In authorizing the bond issue, BOD must stipulate number
of bonds to be authorized, total face value, and
contractual interest rate.
• Terms of bond are set forth in a legal document called a
bond indenture
• Beside bond indenture, the bond issuer also issues a bond
certificate for bondholders
• Bond certificate
 Issued to investor
 Provides name of the issuer, face value,
contractual interest rate, and maturity date
• Face value - principal due at maturity
• Maturity date - date final payment is due
• Contractual interest rate – annual rate used to
determine cash interest paid, also referred to as the
stated rate

Bond Trading
• Bondholders can sell their bonds at any time on national
securities exchanges
• Bonds prices are quoted as a percentage of face value
which is usually $1,000
• Corporation makes journal entries only when it issues or
buys back bonds, or when bondholders convert bonds
into common stock
• Market information for bonds:
Issuer Maturity Close Yield Est. Volume (000)
Boeing Co. 5.125 Feb. 15, 2020 96.595 5.747 33,965

Do It! 1: Bond Terminology
State whether each of the following statements is true or false.
1. Mortgage bonds and sinking fund bonds are both
examples of secured bonds.
2. Unsecured bonds are also known as debenture
bonds.
3. The stated interest rate is the rate investors demand for
lending funds.
4. The face value is the amount of principal the issuing
company must pay at the maturity date.
5. The bond issuer must make journal entries to record
transfers of its bonds among investors.
Explain How to Account for Bond
Transactions

Accounting for Bond Transactions
• A company records bond transactions when
 it issues (sells) or redeems (buys back) bonds
 bondholders convert bonds into ordinary shares
• Bonds may be issued at
 face value
 below face value (discount)
 above face value (premium)
• Bond prices are quoted as a percentage of face value

Issuing Bonds at Face Value (1 of 2)
Illustration: On January 1, 2020, Candlestick AG issues
€100,000, five-year, 10% bonds at 100 (100% of face value).
The entry to record the sale is:
Jan. 1
Prepare the entry Candlestick would make to accrue interest

on December 31.
Dec. 31

Issuing Bonds at Face Value (2 of 2)
Prepare the entry Candlestick would make to pay the interest
on Jan. 1, 2021.
Jan. 1

Discount or Premium on Bonds (1 of 3)
Interest Rates and Bond Prices
Eg. On January 1, 2020, Candlestick AG issues

€100,000, five-year, 10% bonds. Calculate market
price of the bond on Jan 1, 2020. market interest rate:
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Discount or Premium on Bonds (2 of 3)
Review Question
Karson Ltd. issues 10-year bonds with a maturity value of £200,000.
If the bonds are issued at a premium, this indicates that:
a. the contractual interest rate exceeds the market interest
rate.
b. the market interest rate exceeds the contractual interest
rate.
c. the contractual interest rate and the market interest rate
are the same.
d. no relationship exists between the two rates.

Issuing Bonds at a Discount (1 of 2)
Illustration: Assume that on January 1, 2020, Candlestick
AG sells €100,000, five-year, 10% bonds for €98,000 (98% of
face value). Interest is payable annually on Dec 31. The
entry to record the issuance is as follows.
Jan. 1 Cash 98,000

Bonds Payable 98,000

Issuing Bonds at a Discount (2 of 2)
Statement Presentation
Candlestick AG
Statement of Financial Position (partial)
Non-current liabilities
Bonds payable €98,000
The issuing company must pay not only the contractual interest
rate over the term of the bonds but also the face value (rather
than the issuance price) at maturity.

Total Cost of Borrowing (1 of 2)
Bonds Issued at a Discount
Annual interest payments
(€100,000 × 10% = €10,000; €10,000 × 5) €50,000
Add: Bond discount (€100,000 − €98,000) 2,000
Total cost of borrowing €52,000
Bonds Issued at a Discount

Principal at maturity €100,000
Annual interest payments (€10,000 × 5) 50,000
Cash to be paid to bondholders 150,000
Less: Cash received from bondholders 98,000

Issuing Bonds at a Discount
Effective- interest method of Bond Amortization:
Illustration: Assume that on January 1, 2020, Candlestick AG sells
€100,000, five-year, 10% bonds for €98,000 (98% of face value).
Interest is payable annually on Dec 31. Market interest rate on Jan 1,
2020: 10,5348%
Year Bond payable Interest Coupon Bond payable
opening expense payment closing
balance (10.5348%) (10%) balance
2020 98,000 10,324 10,000 98,324

2021 98,324 10,358 10,000 98,682
2022 98,682 10,396 10,000 99,078
2023 99,078 10,438 10,000 99,516
2024 99,516 10,484 10,000 100,000
Issuing Bonds at a Discount
Effective- interest method of Bond Amortization:
- On January 1, 2020, Candlestick records issuance of bonds
Dr Cash: 10,000
Cr Bonds payable: 10,000
- On December 31, 2020, Candlestick records the accrual of interest and
amortization of bond discount
- On December 31, 2020, Candlestick records coupon payment

Dr Bonds payable: 10,000
Cr Cash: 10,000

Issuing Bonds at a Premium (1 of 2)
Illustration: Assume that the Candlestick AG bonds
previously described sell for €102,000 (102% of face value)
rather than for €98,000. The entry to record the sale is as
follows:
Jan. 1 Cash 102,000

Issuing Bonds at a Premium (2 of 2)
Statement Presentation
Candlestick AG
Statement of Financial Position (partial)
Non-current liabilities
Bonds payable €102,000
The borrower is not required to pay the bond premium at the

maturity date of the bonds. Thus, the bond premium is considered
to be a reduction in the cost of borrowing.

Total Cost of Borrowing (2 of 2)
Bonds Issued at a Premium
Annual interest payments Blank
(€100,000 × 10% = €10,000; €10,000 × 5) €50,000
Less: Bond premium(€102,000 − €100,000) 2,000
Bonds Issued at a Premium

Principal at maturity €100,000
Annual interest payments (€10,000 × 5) 50,000
Cash to be paid to bondholders 150,000
Less: Cash received from bondholders 102,000
Total cost of borrowing € 48,000

Issuing Bonds at a Premium
Amortization of bond premium:
Illustration: Assume that on January 1, 2020, Candlestick AG sells
€100,000, five-year, 10% bonds for €102,000 (102% of face value).
Interest is payable annually on Dec 31. Market interest rate on Jan
1, 2020: 9.4794%
opening expense payment closing
balance (9.4794%) (10%) balance
2020 102,000 9,669 10,000 101,669

2021 101,669 9,638 10,000 101,307
2022 101,307 9,603 10,000 100,910
2023 100,910 9,566 10,000 100,476
2024 100,476 9,524 10,000 100,000
E11.12 (Page 530)
Lorance SpA issued €400,000, 7%, 20-year bonds on January 1, 2020,
for €360,727. This price resulted in an effective-interest rate of 8% on
the bonds. Interest is payable annually on December 31.
Lorance uses the effective-interest method to amortize bond premium or
discount.
Instructions
Prepare the journal entries to record the following. (Round to the nearest
euro.)
a. The issuance of the bonds.
b. The accrual of interest on December 31, 2020.
c. The coupon payment on Dec 31, 2020

Redeeming Bonds at Maturity
After 20 years, Lorance SpA records the redemption of its
bonds at maturity as follows:
Dec. 31 Bonds Payable 400,000

Cash 400,000

Redeeming Bonds before Maturity (1 of 2)
When a company retires bonds before maturity, it is
necessary to:
1. eliminate carrying value of bonds at redemption date
2. record cash paid
3. recognize gain or loss on redemption
The carrying value of the bonds is the face value of the
bonds less unamortized bond discount or plus
unamortized bond premium at the redemption date.

Redeeming Bonds before Maturity (2 of 2)
Illustration: Lorance SpA issued €400,000, 7%, 20-year bonds
on January 1, 2020, for €360,727. The effective-interest rate of
the bonds is 8%. Interest is payable annually on January 1, next
year. Assume at the end of the 2nd period, Lorance SpA retires
the bonds at $364,000 after paying the annual interest.

opening expense (8%) payment closing
balance (7%) balance
2020 360,727 28,858 28,000 361,585

2021 361,585 28,927 28,000 362,512

Redeeming Bonds before Maturity (2
of 2)
Journal entry to record the redemption before maturity.
Dec. 31 Bonds Payable 362,512

Loss on Bond Redemption 1,488
Cash 364,000

Do It! 2b: Bond Redemption
R & B Ltd. issued £500,000, 10-year bonds at a discount. Prior
to maturity, when the carrying value of the bonds is £496,000,
the company redeems the bonds at 98. Prepare the entry to
record the redemption of the bonds.

Gain on Bond Redemption 6,000
Cash 490,000

Explain How to Account for Other Non-
Current Liabilities

Accounting for Non-Current Liabilities (1 of 2)
Long-Term Notes Payable

• Obligations in the form of written notes is called notes
payable. Long-term notes payable has the term exceeds
one year.
• May be secured by a mortgage
• Typically terms require borrower to make installment
payments over term of loan. Each payment consists of
1. interest on unpaid balance of loan
2. a reduction of loan principal
• Companies initially record mortgage notes payable at face
value
34
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Long-Term Notes Payable (1 of 2)
Illustration: Mokok Technology Ltd. issues a HK$500,000, 8%,
20-year mortgage note on December 31, 2020. The terms
provide for annual installment payments of HK$50,926 in
arrear.
Notes Notes
payable Interest payable
Opening Expense Cash Closing
Year balance (8%) Payment balance
2021 500,000 40,000 50,926 489,074
2022 489,074 39,126 50,926 477,274
2023 477,274 38,182 50,926 464,530
2024 464,530 37,162 50,926 450,766

Long-Term Notes Payable (2 of 2)
Illustration: Mongkok records the mortgage loan, accrued
interest and first installment payment as follows:
Dec. 31
Dec. 31

Do It! 3: Long-Term Notes
Cole Research issues a ₩250,000,000, 6%, 20-year mortgage
note to obtain needed financing for a new lab. The terms call
for annual payments of ₩21,796,000 each. Prepare the entries
to record the mortgage loan, accrued interest and the first
installment payment.

Accounting for Non-Current Liabilities (2 of 2)
Lease Liabilities
A lease is a contractual agreement between a lessor and a
lessee.
• Gives lessee the right to use specific property for a
specified period of time
• Lessee makes rental payments over the lease term to the
lessor
Leasing has grown tremendously in popularity. Instead of
borrowing money to buy an airplane, computer, nuclear core, a
company makes periodic payments to lease these assets. The
global leasing-equipment market is over a $900 billion business
Lease Liabilities (1 of 2)
Accounting for Lease Arrangements
A lessee recognizes a lease liability and a right-of-use asset
for all leases with a term greater than one year.
Illustration: Gonzalez Construction decides to lease new
equipment. The lease term is four years. Annual payment of
$50,000 is paid in arrear. The implicit effective interest of the
lease is 6%.
PV of future lease payment: PV = $173,255
Right-of-Use Asset 173,255
Lease Liability 173,255
Lease Liabilities (2 of 2)
Accounting for Lease Arrangements
• Right-of-use asset is amortised and reported on the
statement of financial position under non-current
assets.
• Lease liability is reported on the statement of financial
position as a liability.
• Portion of lease liability expected to be paid in the
next year is a current liability with the remainder
classified as a non-current liability

Lease Liabilities
Illustration: Gonzalez Construction decides to lease new
equipment. The lease term is four years. Annual payment of
$50,000 is paid in arrear. The implicit effective interest of the
lease is 6%.
Required:
- Prepare journal entries at the end of 1 st year to record:
a) Amortization expense
b) Accrued interest
c) Lease payment
- Identify current and non-current lease liability reported on
Gonzalez’s financial statement of 1st year
Discuss How Non-Current Liabilities are
Reported and Analyzed

Reporting and Analyzing NCL
Presentation
• Companies report NCL in a separate section of the SOFP
immediately before current liabilities
• Alternatively, companies may present summary data in the

SOFP, with detailed data (interest rates, maturity dates,
conversion privileges, etc) shown in a supporting schedule.
Analysis (1 of 2)
Two ratios that provide information about debt-paying
ability and long-run solvency are:
• Debt to Total Assets Ratio (Debt ratio)
• Times Interest Earned Ratio (Interest coverage ratio)

Analysis (2 of 2)
To illustrate these ratios, we will use data from an LG (KOR)
annual report. The company had total liabilities of W22,839
billion, total assets of W35,528 billion, interest expense of
W827 billion, income taxes of W354 billion, and net income of
W223 billion.
Total Liabilities ÷ Total Assets = Debt to Assets

Ratio
₩22,839 ÷ ₩35,528 = 64.3%
Net Income + Interest Expense Interest Times Interest
+ Income Tax Expense ÷ Expense = Earned
₩223 + ₩827 + ₩354 ÷ ₩827 = 1.70 times

Debt and Equity Financing (1 of 3)
To obtain large amounts of long-term capital, managers have to decide whether
to issue additional ordinary shares (equity financing), bonds or notes (debt
financing), or a combination of the two.
Bond Financing Advantages

1. Shareholder control is not affected.
Bondholders do not have voting rights, so current owners
(shareholders) retain full control of the company.
2. Tax savings result.

Bond interest is deductible for tax purposes; dividends on
stock are not.
3. Return per share (EPS) may be higher.

Although bond interest expense reduces net income,
earnings per share is higher under bond financing because no
additional shares are issued.

Illustration: Microsystems is considering two plans for
financing the construction of a new €5 million plant. Plan A
involves issuance of 200,000 ordinary shares at the current
market price of €25 per share. Plan B involves issuance of €5
million, 8% bonds at face value. Income before interest and
taxes on the new plant will be €1.5 million. Income taxes are
expected to be 30%. Microsystems currently has 100,000
ordinary shares outstanding.
The alternative effects on the return on common stockholders’
equity are shown in the next Illustration.

Plan A: Plan B:
Issue Shares Issue Bonds
Income before interest and taxes-PBIT €1,500,000 €1,500,000
Interest (8% × €5,000,000) 0 400,000
Income before income taxes – PBT 1,500,000 1,100,000
Income tax expense (30%) 450,000 330,000
Net income - PAT €1,050,000 € 770,000
Outstanding shares 300,000 100,000

Earnings per share €3.50 €7.70
Debt financing generates €280,000 less net income. However, EPS is

higher because there are 200,000 fewer ordinary shares outstanding.
Exercise 1:
On January 1, 2020, Jade SA issued €2,000,000 face value, 7%, 10-year bonds
at €2,147,202. This price resulted in a 6% effective-interest rate on the bonds.
Jade uses the effective-interest method to amortize bond premium or discount.
The bonds pay annual interest on each Dec 31.
Instructions
a) Prepare the journal entries to record the following transactions.
- The issuance of the bonds on January 1, 2020.
- Accrual of interest and amortization of the premium on December 31, 2020.
- The payment of interest on Dec 31, 2020.
b) Show the proper non-current liabilities statement of financial position
presentation for the bond liability at December 31, 2020.
c) At Dec 31, 2021, Jade SA negotiated to redeem the bonds before maturity at
€2,258,000, prepare journal entry to record the redemption.

Exercise 2 (P11.3):
Talkington Electronics issues a R$400,000, 8%, 10-year mortgage note on
December 31, 2019. The proceeds from the note are to be used in
financing a new research laboratory. The terms of the note provide for
annual installment payments, exclusive of real estate taxes and insurance,
of R$59,612. Payments are due on December 31.
Instructions
a. Prepare an installment payments schedule for the first 4 years.
b. Prepare the entries for (1) the loan and (2) the first installment payment.
c. Show how the total mortgage liability should be reported on the
statement of financial position at December 31, 2020.

Exercise 3:
Ruggiero Inc. started a lease contract for a delivery equipment on January
1, 2020. Ruggiero did not receive title to the properties leased during or at
the end of the lease term. Interest rate implicit in the lease is 11.11%. Lease
contract is as follow:
- Yearly rental in arrear: $4,200
- Lease term: 4 years
- Estimated economic life of the equipment: 7 years
Required:
a) Prepare journal entries to record
- The RoU asset on Jan 1, 2020
- Depreciation expense on 31 Dec, 2020
- The accrued interest on lease liability on Dec 31, 2020
- The lease payment on Dec 31, 2020
b) Identify current and non-current
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Financial Accounting

IFRS 4th Edition

Lecturer: Nguyen Thi Thanh Loan

Copyright ©2019 John Wiley & Sons, Inc. 3

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Prepare the entry Candlestick would make to accrue interest

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Eg. On January 1, 2020, Candlestick AG issues

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Jan. 1 Cash 98,000

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Bonds Issued at a Discount

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2020 98,000 10,324 10,000 98,324

- On December 31, 2020, Candlestick records coupon payment

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The borrower is not required to pay the bond premium at the

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Bonds Issued at a Premium

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2020 102,000 9,669 10,000 101,669

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Dec. 31 Bonds Payable 400,000

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Year Bond payable Interest Coupon Bond payable

2020 360,727 28,858 28,000 361,585

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Journal entry to record the redemption before maturity.

Dec. 31 Bonds Payable 362,512

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Bonds Payable 496,000

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Long-Term Notes Payable

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• Alternatively, companies may present summary data in the

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Total Liabilities ÷ Total Assets = Debt to Assets

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Bond Financing Advantages

2. Tax savings result.

3. Return per share (EPS) may be higher.

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Outstanding shares 300,000 100,000

Debt financing generates €280,000 less net income. However, EPS is

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