chapter 15-1 chapter 15 accounting principles, ninth edition long-term liabilities

Chapter 15-1

Chapter 15

Accounting Principles, Ninth Edition

Long-Term Liabilities

Chapter 15-2

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 long-term notes payable.

5. Contrast the accounting for operating and capital leases.

6. Identify the methods for the presentation and analysis of long-term liabilities.

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

Chapter 15-3

Issuing bonds Issuing bonds at face valueat face value

Discount or Discount or premiumpremium

Issuing bonds Issuing bonds at a discountat a discount

Issuing bonds Issuing bonds at a premiumat a premium

Bonds BasicsBonds BasicsBonds BasicsBonds Basics Bond IssuesBond IssuesBond IssuesBond Issues Bond Bond RetirementsRetirements

Bond Bond RetirementsRetirements

Other Long-Other Long-Term Term

LiabilitiesLiabilities

Other Long-Other Long-Term Term

LiabilitiesLiabilities

Statement Statement Presentation Presentation and Analysisand Analysis

Statement Statement Presentation Presentation and Analysisand Analysis

Types of Types of bondsbonds

Issuing Issuing proceduresprocedures

TradingTrading

Market valueMarket value

Redeeming Redeeming bonds at bonds at maturitymaturity

Redeeming Redeeming bonds before bonds before maturitymaturity

Converting Converting bonds into bonds into common common stockstock

Long-term Long-term notes payablenotes payable

Lease Lease liabilitiesliabilities

PresentationPresentation

AnalysisAnalysis

Long-Term LiabilitiesLong-Term LiabilitiesLong-Term LiabilitiesLong-Term Liabilities

Chapter 15-4

Bonds are a form of interest-bearing notes payable.

Three advantages over common stock:

Bond BasicsBond BasicsBond BasicsBond Basics

SO 1 Explain why bonds are issued.SO 1 Explain why bonds are issued.

1. Stockholder control is not affected.

2. Tax savings result.

3. Earnings per share may be higher.

Chapter 15-5

Effects on earnings per share—stocks vs. bonds.



Illustration 15-2

Chapter 15-6

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.

QuestionQuestion



Chapter 15-7

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

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



Issuer of Bonds

Issuer of Bonds

MaturityDate

MaturityDate

Illustration 15-3

Contractual Interest

Rate

Contractual Interest

Rate

Face or Par ValueFace or

Par Value

Chapter 15-10

Bond TradingBonds traded on national securities exchanges.

Newspapers and the financial press publish bond prices and trading activity daily.



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

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

6%

8%

10%

Premium

Face Value

Discount

Assume Contractual Rate of 8%Assume Contractual Rate of 8%

Accounting for Bond IssuesAccounting for Bond IssuesAccounting for Bond IssuesAccounting for Bond Issues

SO 2 Prepare the entries for the issuance of bonds and interest expense.

Bonds Sold AtMarket Interest

Chapter 15-13 SO 2 Prepare the entries for the issuance of bonds and interest

expense.

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.

QuestionQuestion



expense.

Karson Inc. 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.

QuestionQuestion


Chapter 15-15

Illustration: On January 1, 2010, CandlestickCorporation issues $100,000, five-year, 10% bonds at 100 (100% of face value). The entry to record the sale is:

Issuing Bonds at Face ValueIssuing Bonds at Face ValueIssuing Bonds at Face ValueIssuing Bonds at Face Value


Jan. 1 Cash 100,000

Bonds payable 100,000

Chapter 15-16

Illustration: On January 1, 2010, CandlestickCorporation issues $100,000, five-year, 10% bonds at 100 (100% of face value). Assume that interest ispayable semiannually on January 1 and July 1. Prepare the entry to record the payment of interest on July 1, 2010, assume no previous accrual.



July 1 Bond interest expense 5,000

Cash 5,000

Chapter 15-17

Illustration: On January 1, 2010, CandlestickCorporation issues $100,000, five-year, 10% bonds at 100 (100% of face value). Assume that interest ispayable semiannually on January 1 and July 1. Prepare the entry to record the accrual of interest on December 31, 2010, assume no previous accrual.



Dec. 31 Bond interest expense 5,000

Bond interest payable 5,000

Chapter 15-18

Issuing Bonds at a DiscountIssuing Bonds at a DiscountIssuing Bonds at a DiscountIssuing Bonds at a Discount


Illustration: On January 1, 2010, Candlestick, Inc. sells $100,000, five-year, 10% bonds for $92,639 (92.639% of face value). Interest is payable on July 1 and January 1. The entry to record the issuance is:Jan. 1 Cash 92,639

Discount on bonds payable 7,361

Bond payable 100,000

Chapter 15-19

Statement PresentationStatement Presentation



Illustration 15-6

Chapter 15-20



Total Cost of BorrowingTotal Cost of Borrowing

Illustration 15-7

Illustration 15-8


expense.

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.

QuestionQuestion



expense.

Illustration: On January 1, 2010, Candlestick, Inc. sells $100,000, five-year, 10% bonds for $108,111 (108.111% of face value). Interest is payable on July 1 and January 1. The entry to record the issuance is:Jan. 1 Cash 108,111

Bonds payable 100,000

Premium on bond payable 8,111

Issuing Bonds at a PremiumIssuing Bonds at a PremiumIssuing Bonds at a PremiumIssuing Bonds at a Premium

Chapter 15-23

Statement PresentationStatement Presentation


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.


Illustration 15-9


expense.

Total Cost of BorrowingTotal Cost of Borrowing

Illustration 15-10

Illustration 15-11


chapter 15-1 chapter 15 accounting principles, ninth edition long-term liabilities

Documents

use of bonds

issuance of bonds

coupon bonds

callable bonds

serial bonds

bond trading bonds

premium issuing bonds

analysis types of bonds