1 chapter 10 long-term liabilities 1,000 financial accounting, alternate 4e by porter and norton
Post on 21-Dec-2015
220 views
TRANSCRIPT
![Page 1: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/1.jpg)
1
Chapter 10
Long-Term Liabilities
1,000
Financial Accounting, Alternate 4e by Porter and Norton
![Page 2: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/2.jpg)
2
Balance Sheet Classifications
Current Liabilities:
Long-Term Liabilities:
due within one year of the balance sheet date
due beyond one year
1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 28 29 30 3127
1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 28 29 30 3127
![Page 3: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/3.jpg)
3
Long-Term Liabilities
Bonds Payable Notes Payable Leases Deferred Taxes Pensions Other Postretirement Benefits
![Page 4: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/4.jpg)
4
Interest forInvestor
Borrower
Bonds
$10,000 9% BondDue 2019
Long-term borrowing arrangement Interest paid at stated rate and times Principal repaid at maturity date
1,000
Investor
Borrower
![Page 5: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/5.jpg)
5
Bond Features
Collateralized - backed by
specific assets in event of default
Debentures -backed only by general credit-worthiness of issuer
![Page 6: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/6.jpg)
6
Bond Features
Term - Entire principal due on a specific single date
Serial - Principal repaid in installments over time
1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 28 29 30 3127
1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 28 29 30 3127
![Page 7: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/7.jpg)
7
Bond Features
Convertible -
into common stock
Callable / Redeemable - may be retired before maturity date
CommonStock 1,000
![Page 8: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/8.jpg)
8
Bond Interest Rates
Face Rate -
interest is paid at the rate specified on the bond
Market Rate -
the interest rate the bond will yield after selling at a discount or premium
Payche
ck for
Date
Dept..
of Tr
easure
r
Jane D
oe
8% Return
![Page 9: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/9.jpg)
9
Interest Rates and Bond Prices
Above face value (at a premium)
At face value
Below face value (at a discount)
= MARKET RATE
BONDS ISSUED: IF STATED RATE:
> MARKET RATE
< MARKET RATE
![Page 10: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/10.jpg)
10
Bonds Sold at Face Value
Issuance of bonds at face value:
Assets = Liab. + O/E + Rev. – Exp.Cash 10,000 Bonds Pay. 10,000
Face Value of Bonds = Sales Price
![Page 11: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/11.jpg)
11
Relationship of Interest Rates and Bond Prices
BondPrices
BondPrices
MarketInterestRates
MarketInterestRates
![Page 12: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/12.jpg)
12
PV = ?
Calculating Bond Prices - two sets of cash flows
$$
(2) Principal due at maturity(single sum)
PV = ? $$$$$
(1) Interest Payments made each period (annuity)
etc. $$ $$ $$
![Page 13: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/13.jpg)
13
Determining Bond Prices
On 1/1/04, Discount Firm issues: $10,000; 8% bonds. due December 31, 2007 Interest payable annually Market rate of interest = 10%
Calculate the issue price of the bonds.
Example:
![Page 14: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/14.jpg)
PV = ?
Calculating Bond Prices
$800
(1) Interest Payments (4 payments @ $800)
2004 2005 2006 2007
$800 $800
Interest is always paid at rate stated
on bonds ($10,000 @ 8%)
14
$800
![Page 15: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/15.jpg)
Calculating Bond Prices
(2) Principal of $10,000 due at end of 20072007
PV = ? $10,000
(1) Interest Payments (4 payments @ $800)
PV = ? $800 $800
2004 2005 2006 2007
$800 $800
15
![Page 16: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/16.jpg)
16
Present value:interest payments - $ 800 x 3.170 = $ 2,536
(PV; n=4; i = 10%)
principal payment - $ 10,000 x 0.683 = 6,830
(PV; n=4; i = 10%)
Bond issue price: $ 9,366
Example of Price Calculation
…butdiscount
@ market rate
Compute interestpayment at stated rate (i.e. 8%) ...
![Page 17: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/17.jpg)
17
Recording Bond Discounts
Issue bonds at a discount:
Assets = Liab. + O/E + Rev. – Exp.Cash 9,366 Bonds Pay. 10,000
Discount on Bonds Pay. (634)
![Page 18: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/18.jpg)
18
Balance Sheet Presentation of Bond Discount
Long-term Liabilities:
Bonds Payable $10,000 $10,000
Less: Discount on
Bonds Payable (634) - 0 -
$ 9,366 $10,000
At Date Uponof Sale Maturity
amortize to Interest Expense
over the life of th
e bond
![Page 19: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/19.jpg)
19
Determining Bond Prices
Assume Premium Firm sells the same $10,000; 8% bonds when the market rate on similar bonds is 6%.
![Page 20: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/20.jpg)
20
Present value:interest payments - $ 800 x 3.465 = $ 2,772
(PV; n=4; i = 6%)
principal payment - $ 10,000 x 0.792 = 7,920
(PV; n=4; i = 6%)
Bond issue price: $10,692
Example of Price Calculation
…butdiscount
@ market rate
Compute interestpayment at stated rate (i.e. 8%) ...
![Page 21: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/21.jpg)
21
Recording Bond Premiums
Issue bonds at a premium:
Assets = Liab. + O/E + Rev. – Exp.Cash 10,692 Bonds Pay. 10,000
Discount on Bonds Pay. 692
![Page 22: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/22.jpg)
22
Balance Sheet Presentation of Bond Premium
Long-term Liabilities:
Bonds Payable $10,000 $10,000
Plus: Premium on
Bonds Payable 692 - 0 -
$10,692 $10,000
At Date Uponof Sale Maturity
amortize to Interest Expense
over the life of th
e bond
![Page 23: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/23.jpg)
23
Amortization of Bond Premiums and Discounts
Transfer to interest expense over the life of the bond using effective interest method
Discountincreasesinterestexpense
Premiumreducesinterestexpense
![Page 24: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/24.jpg)
Amortization Schedule - Discount
Cash Interest Discount CarryingDate Interest Expense Amortized Value
8% 10% Col. 2 - Col. 1
1/1/04 – – – $ 9,366
12/31/04 $ 800 $ 937 $ 137 9,503
12/31/05 800 950 150 9,653
12/31/06 800 965 165 9,818
12/31/07 800 982 182 10,000
(rounded)
24
![Page 25: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/25.jpg)
Amortization Schedule - Premium
Cash Interest Premium Carrying
Date Interest Expense Amortized Value 8% 6% Col. 1 - Col. 2
1/1/04 – – – $ 10,692
12/31/04 $ 800 $ 642 $ 158 10,534
12/31/05 800 632 168 10,366
12/31/06 800 622 178 10,188
12/31/05 800 612 188 10,000
(rounded)
25
![Page 26: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/26.jpg)
26
Redemption of Bonds
Reasons for early redemption: Excess cash Changing interest rates
Gain = Carrying Value - Redemption Price
(Loss) = Redemption Price - Carrying Value
![Page 27: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/27.jpg)
27
Leases
Contractual arrangement Grants right to use asset in exchange for payment Form of financing
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
Rights
LesseeLessor
![Page 28: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/28.jpg)
28
Capital Lease
Record as asset and corresponding liability (as if purchased through borrowings)
Depreciate asset over lease term
Separate payments into principal and interest components using the effective interest method
![Page 29: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/29.jpg)
29
Criteria for Lease Capitalization
Transfers ownership of property
Contains bargain purchase option
Term is > 75% of property’s life
PV of payments > 90% of property FMV
Title Lease meets one or more:
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
Payche
ck for
Date
Dept.
of Tre
asurer
Jane D
oe
1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 28 29 30 3127
![Page 30: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/30.jpg)
30
Operating Leases
Record as rent (lease) expense each period
Disclose future lease obligations in footnotes
OFFICESPACE
FOR LEASE
![Page 31: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/31.jpg)
Long-Term Liabilities on the Statement of Cash Flows
Operating Activities
Net income xxx
Increase in current liability +
Decrease in current liability –
Investing Activities
Financing Activities
Increase in long-term liability +
Decrease in long-term liability –31
![Page 32: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/32.jpg)
32
Debt-to-Equity Ratio
Total LiabilitiesTotal Stockholders’ Equity
How much have creditors contributed as compared to
owners?
![Page 33: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/33.jpg)
33
Appendix
Accounting Tools:
Other Liabilities
![Page 34: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/34.jpg)
34
Deferred Taxes
Reflects temporary differences between book and tax accounting methods
Book tax expense Cash paid to IRS=Tax
ReturnLiability
IncomeStatementExpense
Pay to the order of:
IRSABC Co.
![Page 35: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/35.jpg)
35
Deferred Income Taxes
Sales
Depreciation expense
Income before tax
Tax rate
Income tax
Book Tax
$6,000 $6,000
2,500 4,000
3,500 2,000
40% 40%
$1,400 $ 800
$ 600
Difference recordedas deferred tax
![Page 36: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/36.jpg)
36
Deferred Income Taxes
Income tax
Book Tax
$1,400 $ 800
Effect on financial statements:
Assets = Liab. + O/E + Rev. – Exp. Tax Pay. 800 Tax Exp. (1,400)
Deferred Tax 600
$ 600
Balance Sheet Income Statement
![Page 37: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/37.jpg)
37
Pensions
Payche
ck for
Date
Dept.
of Tre
asurer
Jane D
oe
Payche
ck for
Date
Dept.
of Tre
asurer
Jane D
oe
Payche
ck for
Date
Dept.
of Tre
asurer
Jane D
oe
Employercontributes
toPension
Fund
Pays benefits to retiredemployees
Date
Dept.
of Tre
asurer
Pension Fund XYZ Corp.
![Page 38: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/38.jpg)
38
Pensions
Expense accrued in period employee earns benefits (regardless of when paid)
Expense may amount funded=
![Page 39: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/39.jpg)
39
Pensions on the Balance Sheet
ASSETS
Prepaid Pension Cost $$
LIABILITIES
Accrued Pension Cost $$
Funding >
Expense
Expense >
Funding
![Page 40: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/40.jpg)
40
Postretirement Benefits
Benefits paid to employees after retirement e.g., health costs
Record expense when employee earns benefits, not when paid (matching principle)
![Page 41: 1 Chapter 10 Long-Term Liabilities 1,000 Financial Accounting, Alternate 4e by Porter and Norton](https://reader036.vdocuments.mx/reader036/viewer/2022062421/56649d575503460f94a362a5/html5/thumbnails/41.jpg)
41
End of Chapter 10
1,000