Chapter
15-1
CHAPTER
CHAPTER 15
15
LONG-TERM LIABILITIES
Accounting Principles, Eighth Edition
Chapter
15-2
Study Objectives
Study 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 longterm notes payable.
5.
Contrast the accounting for operating and capital leases.
6.
Identify the methods for the presentation and analysis of longterm
liabilities.
Chapter
15-3
LongTerm Liabilities
LongTerm Liabilities
Bonds
BondsBasics
Basics
Types of
bonds
Issuing
procedures
Trading
Market value
Chapter
15-4
Accounting
Accounting
for
for Bond
Bond
Issues
Issues
Accounting
Accounting
for
forBond
Bond
Retirements
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
Accounting
for
forOther
Other
Long-Term
Long-Term
Liabilities
Liabilities
Long-term
notes payable
Lease
liabilities
Statement
Statement
Presentation
Presentation
and
andAnalysis
Analysis
Presentation
Analysis
Bond Basics
Bond Basics
Bonds are a form of interestbearing notes payable.
Three advantages over common stock:
Chapter
15-5
1.
Stockholder control is not affected.
2.
Tax savings result.
3.
Earnings per share may be higher.
LO 1 Explain why bonds are issued.
Bond Basics
Bond Basics
Effects on earnings per share—stocks vs. bonds.
Illustration 152
Chapter
15-6
LO 1 Explain why bonds are issued.
Bond Basics
Bond Basics
Question
The major disadvantages resulting from the use of bonds are:
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.
Chapter
15-7
LO 1 Explain why bonds are issued.
Bond Basics
Bond 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 Basics
Bond 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 Basics
Bond Basics
Issuer
Issuer of
of
Bonds
Bonds
Illustration 153
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 Basics
Bond Basics
Bond Trading
Bonds traded on national securities exchanges.
Newspapers and the financial press publish bond prices and trading
activity daily.
Illustration 154
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 Basics
Bond 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 for Bond Issues
Accounting for Bond 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 for Bond Issues
Accounting for Bond Issues
Question
The rate of interest investors demand for loaning funds to a
corporation is the:
a. contractual interest rate.
b. face value rate.
c. market interest rate.
d. stated interest rate.
Chapter
15-14
LO 2 Prepare the entries for the issuance of bonds and interest expense.
Accounting for Bond Issues
Accounting for Bond Issues
Question
Karson Inc. issues 10year 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.
Chapter
15-15
LO 2 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at Face Value
Issuing Bonds at Face Value
Illustration: On January 1, 2008, San Marcos HS issues $100,000,
threeyear, 8% bonds at 100 (100% of face value). Interest is paid
annually each Dec. 31.
Jan. 1
Dec. 31
Chapter
15-16
Cash
Bonds payable
Interest expense
Cash
100,000
100,000
8,000
8,000
LO 2 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at a Discount
Issuing Bonds at a Discount
Illustration: On January 1, 2008, San Marcos HS issues $100,000,
threeyear, 8% bonds for $95,027 (95.027% of face value).
Jan. 1
Cash
95,027
Discount on bonds payable
Bonds payable
Chapter
15-17
4,973
100,000
LO 2 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at a Discount
Issuing Bonds at a 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 Bonds at a Discount
Issuing Bonds at a Discount
Question
Discount on Bonds Payable:
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.
Chapter
15-19
LO 2 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at a Premium
Issuing Bonds at a Premium
Illustration: On January 1, 2008, San Marcos HS issues $100,000,
threeyear, 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 Bonds at a Discount
Issuing Bonds at a 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 for Bond Retirements
Accounting for Bond 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 for Bond Retirements
Accounting for Bond 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 for Bond Retirements
Accounting for Bond Retirements
Question
When bonds are redeemed before maturity, the gain or loss on
redemption is the difference between the cash paid and the:
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.
Chapter
15-24
LO 3 Describe the entries when bonds are redeemed or converted.
Accounting for Bond Retirements
Accounting for Bond 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
100,000
Loss on bond redemption
Cash ($100,000 x 105%)
Discount on bonds payable
Chapter
15-25
6,817
105,000
1,817
LO 3 Describe the entries when bonds are redeemed or converted.