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Long-Term
Long-Term
Liabilities:
Liabilities:
Bondsand
Bondsand
NotesNote
sChapter14
Chapter14
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N
LearningLearningObjectiveObjectiveComputeth
epotentialimpactof
Computethepotentialimpactof
long-termborroingonearnings
long-termborroingonearningspershare!
pershare!
11
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"""""""" Corporations"""""""" Corporations
o Corporations #nance their """""""" usingCorporations #nance their """""""" usingthe folloing sources:the folloing sources:
$hort-term """""""" % such as """""""" """"""""$hort-term """""""" % such as """""""" """"""""
or """""""" on """""""" !or """""""" on """""""" ! Long-term """""""" % such as """""""" """"""""Long-term """""""" % such as """""""" """"""""
or """""""" """""""" !or """""""" """""""" !
&'uit(% such as """""""" """""""" or """"""""&'uit(% such as """""""" """""""" or """"""""
"""""""" !"""""""" !
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)inancing Corporations)inancing Corporations
o * """""""" is a form of an """""""" -* """""""" is a form of an """""""" -"""""""" note! Li+e a note% a """""""""""""""" note! Li+e a note% a """"""""
re'uires periodic """""""" pa(ments% andre'uires periodic """""""" pa(ments% and
the """""""" amount must be repaid at thethe """""""" amount must be repaid at the"""""""" date!"""""""" date!
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)inancing Corporations)inancing Corporations
,uc+adee Corporation is considering the,uc+adee Corporation is considering thefolloing plans to issue debt and e'uit(:folloing plans to issue debt and e'uit(:
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)inancing Corporations)inancing Corporations
o n deciding among #nancing plans% then deciding among #nancing plans% thee.ect on """""""" per """""""" is oftene.ect on """""""" per """""""" is often
considered!considered!
o"""" """ """""/&0$ measures the """""""""""" """ """""/&0$ measures the """"""""earned b( each """""""" of common stoc+!earned b( each """""""" of common stoc+!
t is computed as follos:t is computed as follos:
Earnings per Share =
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LearningLearningObjectiveObjective2escribethecharacteristicsand
2escribethecharacteristicsand
terminolog(ofbondspa(able!
terminolog(ofbondspa(able!
33
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Bond Characteristics and Terminolog(Bond Characteristics and Terminolog(
oThe underl(ing contract beteen theThe underl(ing contract beteen thecompan( """""""" bonds and thecompan( """""""" bonds and the
bondholders is called a """"""""bondholders is called a """""""""""""""" !"""""""" !
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Bond Characteristics and Terminolog(Bond Characteristics and Terminolog(
o 4suall(% the """""""" """""""" of each4suall(% the """""""" """""""" of eachbond% called the principal% is 51%666% or abond% called the principal% is 51%666% or a
"""""""" of 5 """"""""! nterest on bonds"""""""" of 5 """"""""! nterest on bonds
ma( be pa(able """""""" % """""""" % orma( be pa(able """""""" % """""""" % or
"""""""" ! 7ost pa( interest """""""" !"""""""" ! 7ost pa( interest """""""" !
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Bond Characteristics and Terminolog(Bond Characteristics and Terminolog(
o 8hen all bonds of an issue mature at the8hen all bonds of an issue mature at thesame time% the( are called """"""""same time% the( are called """"""""
""""""""!""""""""!
o f the( mature over several dates% the( aref the( mature over several dates% the( arecalled """""""" """"""""!called """""""" """"""""!
o Bonds that ma( be e9changed for otherBonds that ma( be e9changed for other
"""""""" are called """""""" """"""""!"""""""" are called """""""" """"""""!
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Bond Characteristics and Terminolog(Bond Characteristics and Terminolog(
o Bonds that a corporation """""""" theBonds that a corporation """""""" the"""""""" to redeem """""""" their maturit("""""""" to redeem """""""" their maturit(
are called callable """"""""!are called callable """"""""!
o Bonds issued on the basis of the generalBonds issued on the basis of the generalcredit of the corporation are called """""""credit of the corporation are called """""""
""""""""!""""""""!
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0roceeds from ssuing Bonds0roceeds from ssuing Bonds
o 8hen a corporation issues bonds% the8hen a corporation issues bonds% theproceeds """""""" for the bonds dependproceeds """""""" for the bonds depend
on:on:
The """""""" amount of the bonds% hich is theThe """""""" amount of the bonds% hich is theamount """""""" at the """""""" date!amount """""""" at the """""""" date!
The """""""" rate on the bonds!The """""""" rate on the bonds!
The """""""" rate of interest for """""""" bonds!The """""""" rate of interest for """""""" bonds!
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0roceeds from ssuing Bonds0roceeds from ssuing Bonds
oThe """""""" amount and the interestThe """""""" amount and the interest"""""""" on the bonds are identi#ed in the"""""""" on the bonds are identi#ed in the
bond """""""" !bond """""""" !
oThe """""""" """""""" to be paid on theThe """""""" """""""" to be paid on the"""""""" """""""" of the bond is called the"""""""" """""""" of the bond is called the
contract rate or """""""" """"""""!contract rate or """""""" """"""""!
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0roceeds from ssuing Bonds0roceeds from ssuing Bonds
oThe """""""" """""""" of interest% orThe """""""" """""""" of interest% or"""""""" """""""" of interest% is determined"""""""" """""""" of interest% is determined
b( transactions beteen """""""" andb( transactions beteen """""""" and
"""""""" of similar bonds!"""""""" of similar bonds!
oThe mar+et rate of interest is a.ected b( aThe mar+et rate of interest is a.ected b( a
variet( of factors% including investorsvariet( of factors% including investors
e9pectations of """""""" and """"""""e9pectations of """""""" and """"""""
"""""""" conditions!"""""""" conditions!
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0roceeds from ssuing Bonds0roceeds from ssuing Bonds
o $ummar($ummar( f the mar+et rate e'uals the """""""" """""""" %f the mar+et rate e'uals the """""""" """""""" %
bonds ill sell at the """""""" """"""""!bonds ill sell at the """""""" """"""""!
f the selling price of the bonds is less than thef the selling price of the bonds is less than theface amount% the bonds are selling at aface amount% the bonds are selling at a""""""""!""""""""!
f the selling price of the bonds is more than thef the selling price of the bonds is more than the
"""""""" amount% the bonds are """""""" at a"""""""" amount% the bonds are """""""" at a""""""""!""""""""!
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0roceeds from ssuing Bonds0roceeds from ssuing Bonds
oThe """""""" of a bond is 'uoted as aThe """""""" of a bond is 'uoted as a"""""""" of the bonds """""""" """""""" !"""""""" of the bonds """""""" """""""" !
* 5 1%666 bond 'uoted at ;< could be """"""""* 5 1%666 bond 'uoted at ;< could be """"""""
or sold for 5 """""""" /5 """""""" 9 6!"""!or sold for 5 """""""" /5 """""""" 9 6!"""! * 5 1%666 bond 'uoted at 16; could be* 5 1%666 bond 'uoted at 16; could be
purchased or sold for 5 """""""" /5 """""""" 9purchased or sold for 5 """""""" /5 """""""" 9
""!""!""!""!
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LearningLearningObjectiveObjective=ournali>eentriesforbonds
=ournali>eentriesforbondspa(able!
pa(able!??
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"""""""" a Bond 2iscount"""""""" a Bond 2iscount
o The to methods of computing theThe to methods of computing the"""""""" of a bond discount are:"""""""" of a bond discount are:
$traight-line """""$traight-line """""
"""""""" """""""" """""""" method% sometimes"""""""" """""""" """""""" method% sometimescalled the """""""" methodcalled the """""""" method
o Both methods """""""" the same totalBoth methods """""""" the same total
amount of """""""" over the """""""" ofamount of """""""" over the """""""" of
the bonds!the bonds!
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*morti>ing a Bond 2iscount*morti>ing a Bond 2iscount
oThe """""""" """""""" """""""" method isThe """""""" """""""" """""""" method isre'uired b( generall( accepted accountingre'uired b( generall( accepted accounting
principles!principles!
o ,oever% the """""""" - """""""" method,oever% the """""""" - """""""" methodma( be used if the results """"""""ma( be used if the results """"""""
"""""""" """""""" signi#cantl( from the"""""""" """""""" signi#cantl( from the
interest method!interest method!
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Bond """"""""Bond """"""""
o * corporation ma( """""""" % or redeem%* corporation ma( """""""" % or redeem%bonds before the( """""""" ! """"""""bonds before the( """""""" ! """"""""
bonds can be """""""" b( the """"""""bonds can be """""""" b( the """"""""
corporation ithin the period of """"""""corporation ithin the period of """"""""
and at the """""""" stated in the bondand at the """""""" stated in the bond
"""""""" ! Normall(% the """""""" price is"""""""" ! Normall(% the """""""" price is
"""""""" the """""""" value!"""""""" the """""""" value!
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Bond @edemptionBond @edemption
oThe """""""" """""""" of bonds pa(able isThe """""""" """""""" of bonds pa(able isthe """""""" amount of the bonds less an(the """""""" amount of the bonds less an(
"""""""" """""""" or plus an( """""""""""""""" """""""" or plus an( """"""""
"""""""" !"""""""" !
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Bond @edemptionBond @edemption
o * gain or loss ma( be """""""" on a bond* gain or loss ma( be """""""" on a bondredemption as follos:redemption as follos:
* """""""" is recorded if the """""""" paid for* """""""" is recorded if the """""""" paid for
the """""""" is belo the bond """""""" amount!the """""""" is belo the bond """""""" amount!
* """""""" is recorded if the """""""" paid for* """""""" is recorded if the """""""" paid for
the """""""" is above the """""""" amount!the """""""" is above the """""""" amount!
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LearningLearningObjectiveObjective2escribeandillustratethe
2escribeandillustratethe
accountingforinstallmentnotes!
accountingforinstallmentnotes!
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nstallment Notesnstallment Notes
o nstallment notes are often used tonstallment notes are often used topurchase speci#c assets% such as """""""" %purchase speci#c assets% such as """""""" %
and are often """""""" b( the purchasedand are often """""""" b( the purchased
asset!asset!
o 8hen a note is secured b( an """""""" % it8hen a note is secured b( an """""""" % it
is called a """""""" note!is called a """""""" note!
o f the """""""" fails to pa( a """""""" note%f the """""""" fails to pa( a """""""" note%
the lender has the """""""" to ta+ethe lender has the """""""" to ta+e
"""""""" of the """""""" asset!"""""""" of the """""""" asset!
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LearningLearningObjectiveObjective2escribeandillustratethe
2escribeandillustratethe
reportingoflong-termliabilities
reportingoflong-termliabilities
includingbondsandnotes
includingbondsandnotespa(able!
pa(able!
AA
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LearningLearningObjectiveObjective2escribeandillustratehothe
2escribeandillustratehothe
numberoftimesinterestcharges
numberoftimesinterestcharges
areearnedisusedtoevaluatea
areearnedisusedtoevaluatea
compan(:s#nancialcondition!
compan(:s#nancialcondition!
BB
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Number of Times """""" Charges areNumber of Times """""" Charges are""""""""""""""""
o *nal(sts """""""" the ris+ that bondholders*nal(sts """""""" the ris+ that bondholdersill not receive their """""""" pa(ments b(ill not receive their """""""" pa(ments b(computing the """""""" of """""""" """"""""computing the """""""" of """""""" """"""""
"""""""" are """""""" during the (ear as"""""""" are """""""" during the (ear as
follos:follos:
Number of
Times Interest
Charges are
Earned
=
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*ppendi91:
*ppendi91:
0resenta
lueConcepts
0resenta
lueConcepts
and0ricin
gBonds0
a(able
and0ricin
gBonds0
a(able
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0resent alue0resent alue ConceptDConceptD""""""""""""""""BondsBonds""""""""""""""""
o 8hen a corporation issues bonds% the8hen a corporation issues bonds% theprice that """""""" are illing to """"""""price that """""""" are illing to """"""""
for the bonds depends on the folloing:for the bonds depends on the folloing:
The """""""" amount of the bonds% hich is theThe """""""" amount of the bonds% hich is theamount due at the """""""" """""""" !amount due at the """""""" """""""" !
The """""""" interest to be """""""" on theThe """""""" interest to be """""""" on the
bonds!bonds!
The """""""" rate of """""""" !The """""""" rate of """""""" !
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"""""""" """""""""""""""" """""""" ConceptConcept
oThe time value of """""""" conceptThe time value of """""""" conceptrecogni>esrecogni>esthat an amount of cash """"""" """""""" isthat an amount of cash """"""" """""""" is
orth more than the same amount of """"""""orth more than the same amount of """"""""
to be """""""" in the """""""" !to be """""""" in the """""""" !
o"""""""" value is the current orth of a"""""""" value is the current orth of a
"""""""" sum of """""""" or stream of """""""""""""""" sum of """""""" or stream of """"""""
Fos given a """""""" rate of """""""" !Fos given a """""""" rate of """""""" !
oThe amount to be """""""" in the """""""" ifThe amount to be """""""" in the """""""" if(ou ma+e a deposit no is the """"""""(ou ma+e a deposit no is the """"""""
""""""""!""""""""!
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0resent alue of the """""""" """"""""0resent alue of the """""""" """"""""
o * """""""" of e'ual cash receipts spaced* """""""" of e'ual cash receipts spaced"""""""" in time is called an """""""" !"""""""" in time is called an """""""" !
oThe """""""" """""""" of an annuit( is theThe """""""" """""""" of an annuit( is the
sum of the """""""" """""""" of each cashsum of the """""""" """""""" of each cashreceipt!receipt!
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*ppendi93:
*ppendi93:
&.ective
nterest@ate
&.ective
nterest@ate7eth
odof
7ethodo
f
*morti>a
tion
*morti>a
tion
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&.ective """""""" """""""" 7ethod&.ective """""""" """""""" 7ethod
oThe """""""" """""""" """""""" method ofThe """""""" """""""" """""""" method ofamorti>ation% sometimes called theamorti>ation% sometimes called the
________ method________ method% provides for a """"""""% provides for a """"""""
raterateof interest over the """""""" of theof interest over the """""""" of the
bonds!bonds!
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Long-Term
Long-Term
Liabilities:
Liabilities:
Bondsand
BondsandNote
sNote
sThe&ndThe&nd