Financial accounting IFRS 4 kieoso ch11 PPT
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Financial Accounting
IFRS 4th Edition
Weygandt ● Kimmel ● Kieso
Chapter 11
Non-Current Liabilities
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.
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Learning Objective 1
Describe the Major Characteristics of Bonds
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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).
When a company issues bonds, it is borrowing money. The person who buys the bonds (the
bondholder) is investing in bonds.
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Types of Bonds (1 of 2)
Secured and Unsecured Bonds
•
Secured bonds have specific assets of issuer pledged as collateral for bonds
•
Unsecured bonds are issued against general credit of borrower
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Types of Bonds (2 of 2)
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
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Issuing Procedures (1 of 3)
•
Government laws grant corporations power to issue bonds
•
Board of directors and shareholders must approve bond issues
•
Board of directors 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
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Issuing Procedures (2 of 3)
•
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
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Issuing Procedures (3 of 3)
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Bond Trading
•
Bondholders can sell their bonds at any time on national securities exchanges
•
Bonds prices are quoted as a percentage of face value
•
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
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Determining the Market Price of a Bond
Current market price (present value) of a bond is a function of three factors:
1.
dollar amounts to be received,
2.
length of time until amounts are received, and
3.
market rate of interest.
The process of finding the present value is referred to as discounting the future amounts.
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Determining the Price of a Bond
Illustration: Assume that Acropolis SA on January 1, 2020, issues €100,000 of 9% bonds, due in five years,
with interest payable annually at year-end.
Present value of €100,000 received in 5 years
Present value of €9,000 received annually for 5 years
Market price of bonds
€ 64,993
35,007
€100,000
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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.
True
2.
Unsecured bonds are also known as debenture bonds.
True
3.
The stated interest rate is the rate investors demand for loaning funds.
False
4.
The face value is the amount of principal the issuing company must pay at the maturity date.
True
5.
The bond issuer must make journal entries to record transfers of its bonds among investors.
False
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Learning Objective 2
Explain How to Account for Bond Transactions
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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
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Issuing Bonds (1 of 2)
Review Question
The market interest rate:
a.
is the contractual interest rate used to determine the amount of cash interest paid
by the borrower.
b.
is listed in the bond indenture.
c.
is the rate investors demand for loaning funds.
d.
more than one of the above is true.
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Issuing Bonds (2 of 2)
Review Question
The market interest rate:
a.
is the contractual interest rate used to determine the amount of cash interest paid
by the borrower.
b.
is listed in the bond indenture.
c.
is the rate investors demand for loaning funds.
d.
more than one of the above is true.
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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
Cash
100,000
Bonds Payable
100,000
Prepare the entry Candlestick would make to accrue interest on December 31.
Dec. 31
Interest Expense
10,000
Interest Payable
10,000
(€100,000 x 10% x 12/12)
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Issuing Bonds at Face Value (2 of 2)
Prepare the entry Candlestick would make to pay the interest on Jan. 1, 2021.
Jan. 1
Interest Payable
10,000
Cash
10,000
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Discount or Premium on Bonds (1 of 3)
Interest Rates and Bond Prices
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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.
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Discount or Premium on Bonds (3 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.
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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 January 1. The entry to record the issuance
is as follows.
Jan. 1
Cash
98,000
Bonds Payable
98,000
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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.
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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
Total cost of borrowing
€52,000
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