Lecture Principles of financial accouting - Chapter 14: Long-term liabilities

Chapter 14

Long-Term Liabilities

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Winston Kwok, Ph.D., CPA
McGraw­Hill/Irwin

        Copyright © 2011 by The McGraw­Hill Companies, Inc. All rights reserved.


14 ­ 2

A1

Bond Financing
Advantages

Disadvantages

Bonds do not affect
owner control.

Bonds
Bonds require
require
payment

payment of
of both
both
periodic
periodic interest
interest and
and
par
par value
value at
at maturity.
maturity.

Interest on bonds is
tax deductible.
Bonds can increase
return on equity.

Bonds
Bonds can
can decrease
decrease
return
return on
on equity.
equity.


14 ­ 3

A1

Bond Trading

Bonds are securities that can be purchased or
sold in the securities markets. They have a
market value which is expressed as a percent
of their par value. The closing price indicates
that the IBM bond is being sold at 119.25% of
face value.


14 ­ 4

P1

Bond Issuances
Transaction on the Bond Issue Date
Investors

Corporation
Bond Selling Price

Bond
Certificate


14 ­ 5

P1

Bond Issuances
Transactions during the bond life
Bond Interest Payments

Corporation

Bond Issue
Date

Bond Interest Payments

Investors

Interest Payment = Bond Par Value ×
Stated Interest Rate x Time


14 ­ 6

P1

Bond Issuances
Transaction on the Maturity Date
Investors

Corporation
Bond Face Value

14 ­ 7

P1

Issuing Bonds at Par
n Jan. 1, 2011, a company issued the following bonds:
ar Value: $800,000
tated Interest Rate: 9%
nterest Dates: 6/30 and 12/31
aturity Date = Dec. 31, 2030 (20 years)


14 ­ 8

P1

Issuing Bonds at Par
On June 30, 2011, the issuer of the bond pays the
first semiannual interest payment of $36,000.

$800,000 × 9% × ½ year = $36,000
This entry is made every six months until the bonds
mature.


14 ­ 9

P1

Issuing Bonds at Par

On December 31, 2030, the bonds mature and the
issuer of the bond pays face value of $800,000 to
the bondholders.


14 ­ 10

P1

Bond Discount or Premium


14 ­ 11

P2

Issuing Bonds at a Discount
Fila
Fila issues
issues bonds
bonds with
with the
the following
following provisions:
provisions:
Par
Par Value:
Value: $100,000
$100,000

}

Bond will sell at a discount.

Issue
Issue Price:
Price: 96.454%
96.454% of
of par
par value
value
Stated
Stated Interest
Interest Rate:
Rate: 8%
8%
Market
Market Interest
Interest Rate:
Rate: 10%
10%
Interest
Interest Dates:
Dates: 6/30
6/30 and
and 12/31
12/31


14 ­ 12

P2

Issuing Bonds at a Discount

On
On Dec.
Dec. 31,
31, 2011,
2011, Fila
Fila should
should record
record the
the bond
bond issue.
issue.
Par value
$ 100,000
Cash proceeds
96,454
Discount
$
3,546
*$100,000 x 96.454%

Contra-Liability
Contra-Liability
Account
Account

14 ­ 13

P2

Effective Interest Amortization

Date
12/31/2011
6/30/2012
12/31/2012
6/30/2013
12/31/2013

Effective Interest Amortization Schedule
Interest
Interest
Discount
Unamortized Carrying
Payment
Expense Amortization*
Discount
Value
$
3,546 $ 96,454
$
4,000 $
4,823 $
823
2,723

97,277
4,000
4,864
864
1,859
98,141
4,000
4,907
907
952
99,048
4,000
4,952
952
0
100,000
$ 16,000 $ 19,546 $
3,546

* Rounded.

$96,454 × 5% = $4,823

$100,000 - $2,723 = $97,277


14 ­ 14

P2

Amortizing a Bond Discount


14 ­ 15

P3

Issuing Bonds at a Premium
Adidas
Adidas issues
issues bonds
bonds with
with the
the following
following provisions:
provisions:
Par
Par Value:
Value: $100,000
$100,000

}

Bond will sell at a premium.

Issue
Issue Price:
Price: 103.546%
103.546% of
of par

par value
value
Stated
Stated Interest
Interest Rate:
Rate: 12%
12%
Market
Market Interest
Interest Rate:
Rate: 10%
10%
Interest
Interest Dates:
Dates: 6/30
6/30 and
and 12/31
12/31


14 ­ 16

P3

Issuing Bonds at a Premium
On
On Dec.
Dec. 31,
31, 2011,
2011, Adidas

Adidas will
will record
record the
the bond
bond issue
issue as:
as:
Par value

$ 100,000

Cash proceeds
Premium

103,546 *
$
3,546

*$100,000 x 103.546%

Adjunct-Liability
Adjunct-Liability
Account
Account


14 ­ 17

P3

Amortizing a Bond Premium


14 ­ 18

P2

Bond Pricing
Cash Outflows related to Interest Payments

Cash Outflows for par value at end of Bond life


14 ­ 19

P2

Issuing Bonds at a Discount
Fila
Fila issues
issues bonds
bonds with
with the
the following
following provisions:
provisions:
Par
Par Value:
Value: $100,000
$100,000

Issue
Issue Price:
Price: ??
Stated
Stated Interest
Interest Rate:
Rate: 8%
8%
Market
Market Interest
Interest Rate:
Rate: 10%
10%
Interest
Interest Dates:
Dates: 6/30
6/30 and
and 12/31
12/31


14 ­ 20

P2

Present Value of a Discount Bond
To
To calculate
calculate Present
Present Value,

Value, we
we need
need relevant
relevant interest
interest rate
rate
and
and number
number of
of periods.
periods.
Semiannual
Semiannual rate
rate == 5%
5% (Market
(Market rate
rate 10%
10% ÷÷ 2)
2)
Semiannual
Semiannual periods
periods == 44 (Bond
(Bond life
life 22 years
years ×× 2)
2)

$100,000
$100,000 ×× 8%
8% ×× ½

½ == $4,000
$4,000


14 ­ 21

P4

Bond Retirement
Retirement
Retirement of
of the
the Fila
Fila bonds
bonds at
at maturity
maturity for
for
$100,000
$100,000 cash.
cash.

Because any discount or premium will be fully amortized at
maturity, the carrying amount of the bonds will be equal to par value.


14 ­ 22

P4

Bond Retirement
Retirement of Bonds before Maturity
Carrying Amount > Retirement Price = Gain
Carrying Amount < Retirement Price = Loss

Assume that $100,000 of callable bonds will be retired
on July 1, 2011, after the first interest payment. The
bond carrying amount is $104,500.The bonds have a
call premium of $3,000.


14 ­ 23

P4

Bond Retirement
By Conversion
On
On January
value bonds
bonds of
Converse, with
January 1,
1, $100,000
$100,000 par
par value
of Converse,
with aa
carrying
carrying amount

amount of
of $100,000,
$100,000, are
are converted
converted to
to 15,000
15,000
ordinary
ordinary shares
shares of
par value.
of $2
$2 par
value.

15,000
15,000 shares
shares ×× $2
$2 par
par value
value per
per share
share


14 ­ 24

C1

Long-Term Notes Payable

Cash

Company

Note
Note Payable
Payable

Lender

When is the repayment of the principal
and interest going to be made?
Note Date

Note Maturity
Date


14 ­ 25

C1

Long-Term Notes Payable
Single Payment of
Principal plus Interest
Company

Lender

Single Payment of

Principal plus
Interest
Note Date

Note Maturity
Date