Accounting principles 8th weygars kieso kimmel chapter 15

Chapter
15-1


CHAPTER
CHAPTER 15
15

LONG-TERM LIABILITIES

Accounting Principles, Eighth Edition
Chapter
15-2


Study
Study Objectives
Objectives
1.

Explain why bonds are issued.

2.

Prepare the entries for the issuance of bonds and
interest expense.

3.

Describe the entries when bonds are redeemed or
converted.

4.

Describe the accounting for long-term notes
payable.

5.

Contrast the accounting for operating and capital
leases.

6.

Identify the methods for the presentation and
analysis of long-term liabilities.

Chapter
15-3


Long-Term
Long-Term Liabilities
Liabilities

Bonds Basics

Types of
bonds
Issuing
procedures

Trading
Market value

Chapter
15-4

Accounting
for Bond
Issues

Accounting
for Bond
Retirements

Issuing bonds
at face value
Discount or
premium
Issuing bonds
at a discount
Issuing bonds
at a premium

Redeeming
bonds at
maturity
Redeeming
bonds before
maturity
Converting

bonds into
common
stock

Accounting
for Other
Long-Term
Liabilities
Long-term
notes payable
Lease
liabilities

Statement
Presentation
and Analysis
Presentation
Analysis


Bond
Bond Basics
Basics
Bonds are a form of interest-bearing notes
payable.
Three advantages over common stock:
1.

Stockholder control is not affected.

2. Tax savings result.
3. Earnings per share may be higher.

Chapter
15-5

LO 1 Explain why bonds are issued.


Bond
Bond Basics
Basics
Effects on earnings per share—stocks vs. bonds.
Illustration 15-2

Chapter
15-6

LO 1 Explain why bonds are issued.


Bond
Bond Basics
Basics
Question
The major disadvantages resulting from the use of
bonds are:

Chapter
15-7

a.

that interest is not tax deductible and the
principal must be repaid.

b.

that the principal is tax deductible and interest
must be paid.

c.

that neither interest nor principal is tax
deductible.

d.

that interest must be paid and principal repaid.
LO 1 Explain why bonds are issued.


Bond
Bond Basics
Basics
Types of Bonds
Secured and Unsecured (debenture) bonds.
Term and Serial bonds.
Registered and Bearer (or coupon) bonds.
Convertible and Callable bonds.

Chapter
15-8

LO 1 Explain why bonds are issued.


Bond
Bond Basics
Basics
Issuing Procedures
Bond contract known as a bond indenture.
Represents a promise to pay:
(1) sum of money at designated maturity date, plus
(2) periodic interest at a contractual (stated) rate

on the maturity amount (face value).

Paper certificate, typically a $1,000 face value.
Interest payments usually made semiannually.
Generally issued when the amount of capital needed
is too large for one lender to supply.
Chapter
15-9

LO 1 Explain why bonds are issued.


Bond
Bond Basics

Basics

Issuer
Issuer of
of
Bonds
Bonds

Illustration 15-3

Maturity
Maturity
Date
Date

Contractual
Contractual
Interest
Interest
Rate
Rate

Chapter
15-10

Face
Face or
or
Par
Par Value

Value

LO 1 Explain why bonds are issued.


Bond
Bond Basics
Basics
Bond Trading
Bonds traded on national securities exchanges.
Newspapers and the financial press publish bond
prices and trading activity daily.
Illustration 15-4

Read as: Outstanding 5.125%, $1,000 bonds that mature in
2011. Currently yield a 5.747% return. On this day,
$33,965,000 of these bonds were traded. Closing price was
96.595% of face value, or $965.95.
Chapter
15-11

LO 1 Explain why bonds are issued.


Bond
Bond Basics
Basics
Determining the Market Value of Bonds
Market value is a function of the three factors that
determine present value:

1. the dollar amounts to be received,
2. the length of time until the amounts are received,
and
3. the market rate of interest.
The features of a bond (callable, convertible, and so
on) affect the market rate of the bond.
Chapter
15-12

LO 1 Explain why bonds are issued.


Accounting
Accounting for
for Bond
Bond Issues
Issues
Assume Contractual Rate of 8%

Chapter
15-13

Market Interest

Bonds Sold At

6%

Premium

8%

Face Value

10%

Discount

LO 2 Prepare the entries for the issuance of bonds and interest expense.


Accounting
Accounting for
for Bond
Bond Issues
Issues
Question
The rate of interest investors demand for loaning
funds to a corporation is the:

Chapter
15-14

a.

contractual interest rate.

b.

face value rate.

c.

market interest rate.

d.

stated interest rate.

LO 2 Prepare the entries for the issuance of bonds and interest expense.


Accounting
Accounting for
for Bond
Bond Issues
Issues
Question
Karson Inc. issues 10-year bonds with a maturity value
of $200,000. If the bonds are issued at a premium,
this indicates that:

Chapter
15-15

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.

LO 2 Prepare the entries for the issuance of bonds and interest expense.


Issuing
Issuing Bonds
Bonds at
at Face
Face Value
Value
Illustration: On January 1, 2008, San Marcos HS
issues $100,000, three-year, 8% bonds at 100 (100% of
face value). Interest is paid annually each Dec. 31.
Jan. 1

Cash
Bonds payable

100,000

Dec. 31

Interest expense
Cash

8,000

Chapter
15-16

100,000
8,000

LO 2 Prepare the entries for the issuance of bonds and interest expense.


Issuing
Issuing Bonds
Bonds at
at aa Discount
Discount
Illustration: On January 1, 2008, San Marcos HS
issues $100,000, three-year, 8% bonds for $95,027
(95.027% of face value).
Jan. 1

Cash

Discount on bonds payable
Bonds payable

Chapter
15-17

95,027
4,973
100,000

LO 2 Prepare the entries for the issuance of bonds and interest expense.


Issuing
Issuing Bonds
Bonds at
at aa Discount
Discount
Statement Presentation
San Marcos HS
Balance Sheet (partial)
Long-term liabilities
Bonds payable
Less: Discount on bonds payable

Chapter
15-18

$ 100,000
4,973

$
95,027

LO 2 Prepare the entries for the issuance of bonds and interest expense.


Issuing
Issuing Bonds
Bonds at
at aa Discount
Discount
Question
Discount on Bonds Payable:

Chapter
15-19

a.

has a credit balance.

b.

is a contra account.

c.

is added to bonds payable on the balance sheet.

d.

increases over the term of the bonds.

LO 2 Prepare the entries for the issuance of bonds and interest expense.


Issuing
Issuing Bonds
Bonds at
at aa Premium
Premium
Illustration: On January 1, 2008, San Marcos HS
issues $100,000, three-year, 8% bonds for $105,346
(105.346% of face value).
Jan. 1

Cash

105,346

Premium on bonds payable
Bonds payable

Chapter
15-20

5,346
100,000

LO 2 Prepare the entries for the issuance of bonds and interest expense.

Issuing
Issuing Bonds
Bonds at
at aa Discount
Discount
Statement Presentation
San Marcos HS
Balance Sheet (partial)
Long-term liabilities
Bonds payable
Add: Premium on bonds payable

$ 100,000
5,346
$ 105,346

Issuing bonds at an amount different from face value is
quite common. By the time a company prints the bond
certificates and markets the bonds, it will be a coincidence
if the market rate and the contractual rate are the same.
Chapter
15-21

LO 2 Prepare the entries for the issuance of bonds and interest expense.


Accounting
Accounting for

for Bond
Bond Retirements
Retirements
Redeeming Bonds at Maturity
San Marcos HS records the redemption of its bonds at
maturity as follows:
Bonds payable
Cash

Chapter
15-22

100,000
100,000

LO 3 Describe the entries when bonds are redeemed or converted.


Accounting
Accounting for
for Bond
Bond Retirements
Retirements
Redeeming Bonds before Maturity
When a company retires bonds before maturity, it is
necessary to:
1. eliminate the carrying value of the bonds at the
redemption date;
2. record the cash paid; and
3. recognize the 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.
Chapter
15-23

LO 3 Describe the entries when bonds are redeemed or converted.


Accounting
Accounting for
for Bond
Bond Retirements
Retirements
Question
When bonds are redeemed before maturity, the gain
or loss on redemption is the difference between the
cash paid and the:

Chapter
15-24

a.

carrying value of the bonds.

b.

face value of the bonds.

c.

original selling price of the bonds.

d.

maturity value of the bonds.

LO 3 Describe the entries when bonds are redeemed or converted.


Accounting
Accounting for
for Bond
Bond Retirements
Retirements
Illustration: The San Marcos HS, 8% bonds of
$100,000 issued on Jan. 1, 2008, are recalled at 105 on
Dec. 31, 2009. Assume that the carrying value of the
bonds at the redemption date is $98,183.
Journal entry at Dec. 31, 2009:
Bonds payable
Loss on bond redemption
Cash ($100,000 x 105%)
Discount on bonds payable

Chapter
15-25

100,000

6,817
105,000
1,817

LO 3 Describe the entries when bonds are redeemed or converted.