1、,Accounting and Reporting of Long-Term Liabilities,Chapter 14,Intermediate Accounting12th EditionKieso, Weygandt, and Warfield,Prepared by Coby Harmon, University of California, Santa Barbara,Current Liabilities and Contingencies,Bonds Payable,Long-Term Notes Payable,Reporting and Analysis of Long-T
2、erm Debt,Issuing bondsTypes and ratingsValuationEffective-interest methodCosts of issuingTreasury bondsExtinguishment,Notes issued at face valueNotes not issued at face valueSpecial situationsMortgage notes payable,Off-balance-sheet financingPresentation and analysis,Bonds Payable,Long-term debt con
3、sists of probable future sacrifices of economic benefits arising from present obligations that are not payable within a year or the operating cycle of the company, whichever is longer.,LO 1 Describe the formal procedures associated with issuing long-term debt.,Examples: Bonds payableNotes payableMor
4、tgages payable,Pension liabilities Lease liabilities,Long-term debt has various covenants or restrictions.,Issuing Bonds,LO 1 Describe the formal procedures associated with issuing long-term debt.,Bond contract known as a bond indenture.Represents a promise to pay: sum of money at designated maturit
5、y date, plusperiodic interest at a specified rate on the maturity amount (face value).Paper certificate, typically a $1,000 face value. Interest payments usually made semiannually. Purpose is to borrow when the amount of capital needed is too large for one lender to supply.,Types of Bonds,LO 2 Ident
6、ify various types of bond issues.,Common types found in practice:Secured and Unsecured (debenture) bonds,Term, Serial, and Callable bonds,Convertible bonds, Commodity-backed bonds, Deep-discount bonds (Zero-interest debenture bonds),Registered bonds and bearer or coupon bonds,Income and Revenue bond
7、s.,Valuation of Bonds Discount and Premium,LO 3 Describe the accounting valuation for bonds at date of issuance.,Between the time the company sets the terms and the time it issues the bonds, the market conditions and the financial position of the issuing corporation may change significantly. Such ch
8、anges affect the marketability of the bonds and thus their selling price.,The investment community values a bond at the present value of its expected future cash flows, which consist of (1) interest and (2) principal.,Interest RatesStated, coupon, or nominal rate = The interest rate written in the t
9、erms of the bond indenture. Market rate or effective yield = rate that provides an acceptable return on an investment commensurate with the issuers risk characteristics. Rate of interest actually earned by the bondholders.,Valuation of Bonds Discount and Premium,LO 3 Describe the accounting valuatio
10、n for bonds at date of issuance.,How do you calculate the amount of interest that is actually paid to the bondholder each period?(Stated rate x Face Value of the bond)How do you calculate the amount of interest that is actually recorded as interest expense by the issuer of the bonds?(Market rate x C
11、arrying Value of the bond),Valuation of Bonds Discount and Premium,LO 3 Describe the accounting valuation for bonds at date of issuance.,1- Depends on Market Rate of interest2- Computation of selling price: - PV of maturity value, plus- PV of interest payments, at what rate?- Market rate of interest
12、3- Semi-annual interest paying bonds:- Require doubling the periods- Halving the interest rate,Valuation of Bonds Discount and Premium,LO 3 Describe the accounting valuation for bonds at date of issuance.,Calculating the Selling Price of a Bond,Bonds Sold At,Market Interest,6%,8%,10%,Premium,Face Va
13、lue,Discount,Valuation of Bonds Discount and Premium,LO 3 Describe the accounting valuation for bonds at date of issuance.,Assume Stated Rate of 8%,Illustration Three year bonds are issued at face value of $100,000 on Jan. 1, 2007, with a stated interest rate of 8%. Interest paid annually on Dec. 31
14、. Calculate the issue price of the bonds, market interest rate of 8%.,LO 3 Describe the accounting valuation for bonds at date of issuance.,Market Rate 8% (PV for 3 periods at 8%),Bonds Issued at Par,Illustration Three year bonds are issued at face value of $100,000 on Jan. 1, 2007, a stated interes
15、t rate of 8%, and market rate of 8%.,Bonds Issued at Par,LO 3 Describe the accounting valuation for bonds at date of issuance.,Illustration Stated rate = 8%. Market rate = 8%.,Bonds Issued at Par,LO 3 Describe the accounting valuation for bonds at date of issuance.,Journal entries for 2007:1/1/07Cas
16、h 100,000Bonds payable100,00012/31/07Interest expense8,000Cash8,000,Illustration Three year bonds are issued at face value of $100,000 on Jan. 1, 2007, and a stated interest rate of 8%. Calculate the issue price of the bonds assuming a market interest rate of 10%.,Bonds Issued at a Discount,LO 4 App
17、ly the methods of bond discount and premium amortization.,Market Rate 10% (PV for 3 periods at 10%),Illustration Three year bonds are issued at face value of $100,000 on Jan. 1, 2007, a stated interest rate of 8%, and market rate of 10%.,*,* rounding,Bonds Issued at a Discount,LO 4 Apply the methods
18、 of bond discount and premium amortization.,Illustration Stated rate = 8%. Market rate = 10%.,Journal entries for 2007:1/1/07Cash 95,027Discount on bonds payable4,973Bonds payable100,00012/31/07Interest expense9,503Discount on bonds payable1,503Cash8,000,Bonds Issued at a Discount,LO 4 Apply the met
19、hods of bond discount and premium amortization.,Illustration Three year bonds are issued at face value of $100,000 on Jan. 1, 2007, and a stated interest rate of 8%. Calculate the issue price of the bonds assuming a market interest rate of 6%.,Market Rate 6% (PV for 3 periods at 6%),Bonds Issued at
20、a Premium,LO 4 Apply the methods of bond discount and premium amortization.,Illustration Three year bonds are issued at face value of $100,000 on Jan. 1, 2007, a stated interest rate of 8%, and market rate of 6%.,Bonds Issued at a Premium,LO 4 Apply the methods of bond discount and premium amortizat
21、ion.,Illustration Stated rate = 8%. Market rate = 6%.,Journal entries for 2007:1/1/07Cash 105,346Premium on bonds payable5,346Bonds payable100,00012/31/07Interest expense6,321Premium on bonds payable1,679Cash8,000,Bonds Issued at a Premium,LO 4 Apply the methods of bond discount and premium amortiza
22、tion.,Buyers will pay the seller the interest accrued from the last interest payment date to the date of issue.On the next semiannual interest payment date, purchasers will receive the full six months interest payment.,Bonds Issued between Interest Dates,LO 4 Apply the methods of bond discount and p
23、remium amortization.,Valuation of Bonds Discount and Premium,Discount on bonds payable is a liability valuation account, that reduces the face amount of the related liability (contra-account).,Classification of Discount and Premium,LO 4 Apply the methods of bond discount and premium amortization.,Va
24、luation of Bonds Discount and Premium,Premium on bonds payable is a liability valuation account, that adds to the face amount of the related liability (adjunct account).,Unamortized bond issue costs are treated as a deferred charge and amortized over the life of the debt.,LO 4 Apply the methods of b
25、ond discount and premium amortization.,Costs of Issuing Bonds,Extinguishment before Maturity DateReacquisition price Net carrying amount = LossNet carrying amount Reacquisition price = GainAt time of reacquisition, unamortized premium or discount, and any costs of issue applicable to the bonds, must
26、 be amortized up to the reacquisition date.,Extinguishment of Debt,LO 5 Describe the accounting for the extinguishment of debt.,Illustration Three year 8% bonds of $100,000 issued on Jan. 1, 2007, are recalled at 105 on Dec. 31, 2008. Expenses of recall are $2,000. Market interest on issue date was
27、8%.,Extinguishment of Debt,LO 5 Describe the accounting for the extinguishment of debt.,Account Balances at Dec. 31, 2008:Bonds payable = $98,183Discount on bonds payable ($4,9731,503-1,653) =1,817,Illustration Three year 8% bonds of $100,000 issued on Jan. 1, 2007, are recalled at 105 on Dec. 31, 2
28、008. Expenses of recall are $2,000. Market interest on issue date was 8%.,Extinguishment of Debt,LO 5 Describe the accounting for the extinguishment of debt.,Journal entry at Dec. 31, 2007:Bonds payable 100,000Loss on extinguishment8,817Cash107,000Discount on bonds payable1,817,Reacquisition price =
29、 $105,000 + 2,000 = $107,000,Long-Term Notes Payable,Accounting is Similar to BondsA note is valued at the present value of its future interest and principal cash flows. Company amortizes any discount or premium over the life of the note.,LO 6 Explain the accounting for long-term notes payable.,BE14
30、-12 Jennifer Capriati, Inc. issued a $100,000, 4-year, 11% note at face value to Forest Hills Bank on January 1, 2008, and received $100,000 cash. The note requires annual interest payments each December 31. Prepare Capriatis journal entries to record (a) the issuance of the note and (b) the Decembe
31、r 31 interest payment.,Notes Issued at Face Value,(a)Cash 100,000Notes payable100,000(b)Interest expense11,000Cash11,000($100,000 x 11% = $11,000),LO 6 Explain the accounting for long-term notes payable.,Zero-Interest-Bearing Notes,Issuing company records the difference between the face amount and t
32、he present value (cash received) as,a discount and amortizes that amount to interest expense over the life of the note.,LO 6 Explain the accounting for long-term notes payable.,BE14-13 McNabb Corporation issued a 4-year, $50,000, zero-interest-bearing note to Reid Company on January 1, 2008, and rec
33、eived cash of $31,776. The implicit interest rate is 12%. Prepare McNabbs journal entries for (a) the Jan. 1 issuance and (b) the Dec. 31 recognition of interest.,LO 6 Explain the accounting for long-term notes payable.,Zero-Interest-Bearing Notes,BE14-13 McNabb Corporation issued a 4-year, $50,000,
34、 zero-interest-bearing note to Reid Company on January 1, 2008, and received cash of $31,776. The implicit interest rate is 12%. Prepare McNabbs journal entries for (a) the Jan. 1 issuance and (b) the Dec. 31 recognition of interest.,(a)Cash 31,776Discount on notes payable18,224Notes payable50,000(b
35、)Interest expense3,813 Discount on notes payable 3,813($31,776 x 12%),LO 6 Explain the accounting for long-term notes payable.,Zero-Interest-Bearing Notes,Interest-Bearing Notes,LO 6 Explain the accounting for long-term notes payable.,BE14-14 Larry Byrd Corporation issued a 4-year, $50,000, 5% note
36、to Magic Johnson Company on Jan. 1, 2008, and received a computer that normally sells for $39,369. The note requires annual interest payments each Dec. 31. The market rate of interest is 12%. Prepare Byrds journal entries for (a) the Jan. 1 issuance and (b) the Dec. 31 interest.,Notes Issued at Face
37、 Value,LO 6 Explain the accounting for long-term notes payable.,(a)Cash 39,369Discount on notes payable10,631Notes payable50,000(b)Interest expense4,724Cash2,500Discount on notes payable 2,224,Notes Issued for Property, Goods, and ServicesWhen exchanging the debt instrument for property, goods, or s
38、ervices in a bargained transaction, the stated interest rate is presumed to be fair unless:,Special Notes Payable Situations,LO 6 Explain the accounting for long-term notes payable.,No interest rate is stated, orThe stated interest rate is unreasonable, orThe face amount is materially different from
39、 the current cash price for the same or similar items or from the market value of the debt instrument.,Choice of Interest RatesIf a company cannot determine the fair value of the property, goods, services, or other rights, and if the note has no ready market, the company must impute an interest rate
40、.,Special Notes Payable Situations,LO 6 Explain the accounting for long-term notes payable.,The choice of rate is affected by:prevailing rates for similar instruments factors such as restrictive covenants, collateral, payment schedule, and the existing prime interest rate.,A promissory note secured
41、by a document called a mortgage that pledges title to property as security for the loan.,Mortgage Notes Payable,LO 6 Explain the accounting for long-term notes payable.,Most common form of long-term notes payable.Payable in full at maturity or in installments.Fixed-rate mortgage. Variable-rate mortg
42、ages.,An attempt to borrow monies in such a way to prevent recording the obligations.,Off-Balance-Sheet Financing,LO 7 Explain the reporting of off-balance-sheet financing arrangements.,Different Forms:Non-Consolidated SubsidiarySpecial Purpose Entity (SPE)Operating Leases,Presentation of Long-Term
43、DebtNote disclosures generally indicate the nature of the liabilities, maturity dates, interest rates, call provisions, conversion privileges, restrictions imposed by the creditors, and assets designated or pledged as security.Must disclose future payments for sinking fund requirements and maturity
44、amounts of long-term debt during each of the next five years.,Presentation and Analysis of Long-Term Debt,LO 8 Indicate how to present and analyze long-term debt.,Analysis of Long-Term Debt,Two ratios that provide information about debt-paying ability and long-run solvency are:,Total debt,Total asse
45、ts,Debt to total assets,=,LO 8 Indicate how to present and analyze long-term debt.,Presentation and Analysis of Long-Term Debt,The higher the percentage of debt to total assets, the greater the risk that the company may be unable to meet its maturing obligations.,1.,Analysis of Long-Term Debt,Two ra
46、tios that provide information about debt-paying ability and long-run solvency are:,Income before income taxes and interest expense,Interest expense,Times interest earned,=,LO 8 Indicate how to present and analyze long-term debt.,Presentation and Analysis of Long-Term Debt,Indicates the companys abil
47、ity to meet interest payments as they come due.,2.,Copyright 2007 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawf
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