Chapter 15-1 CHAPTER 15 LONG-TERM LIABILITIES Accounting Principles, Eighth Edition.

Chapter 15-1

CHAPTER CHAPTER 1515CHAPTER CHAPTER 1515

LONG-TERM LIABILITIESLONG-TERM LIABILITIES

Accounting Principles, Eighth Edition

Chapter 15-2

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 BasicsAccounting Accounting

for Bond for Bond

IssuesIssues

Accounting Accounting

for Bond for Bond

IssuesIssues


for Bond for Bond

RetirementsRetirements


for Bond for Bond

RetirementsRetirements


for Other for Other

Long-Term Long-Term

LiabilitiesLiabilities


for Other for Other

Long-Term Long-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 15-3

Bonds are:• interest-bearing notes payable• issued by corporations, universities, and

governmental agencies • like common stock, can be sold in small

denominations (usually a thousand dollars)

• attract many investors

Bond BasicsBond BasicsBond BasicsBond Basics

LO 1 Explain why bonds are issued.LO 1 Explain why bonds are issued.

Chapter 15-4

To obtain large amounts of long-term capital, management usually must decide whether to issue bonds or to use equity financing (common stock).

Three advantages over common stock:



1. Stockholder control is not affected.

2. Tax savings result.

3. Earnings per share may be higher.

Two disadvantages over common stock:

1)Interest must be paid on a periodic basis2)Principal (face value) must be repaid at maturity

Chapter 15-5

Effects on earnings per share—stocks vs. bonds.



Illustration 15-2

Chapter 15-6

Types of Bonds: Secured and Types of Bonds: Secured and UnsecuredUnsecured

Secured Bonds: also called debenture bonds Secured Bonds: also called debenture bonds are issued against the general credit of the are issued against the general credit of the barrower.barrower.

Unsecured Bonds: have specific assets of Unsecured Bonds: have specific assets of the issuer pledged as collateral for the bonds the issuer pledged as collateral for the bonds

Ex. MortgageEx. Mortgage

Chapter 15-7

Types of Bonds: Term and Serial Types of Bonds: Term and Serial BondsBonds

3) Term bonds - bonds that mature at a single specified future date

4) Serial bonds - bonds that mature in installments

2005 2006 2007 2008RegisteredRegistered

2005 2006 2007 2008

RegisteredRegistered

Chapter 15-8

Types of BondsTypes of BondsConvertible and CallableConvertible and Callable

Convertibleconvert the bonds into

common stock at holder’s option

Callablesubject to call and

retirement at a stated dollar amount prior to maturity at the option of the issuer

Chapter 15-9

Issuing ProceduresBond contract is 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 has a $1,000 face value.

Interest payments are

usually made semiannually.

Generally issued when the amount of capital needed is too large for one lender to supply.



Chapter 15-10



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 15-11

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,

3. the market rate of interest.

Bond Basics - Bond Basics - Determining the Market Value of BondsBond Basics - Bond Basics - Determining the Market Value of Bonds


The features of a bond (callable, convertible, etc) affect the market rate of the bond.

A corporation only makes journal entries when it issues or buys back bonds, and when bondholders convert bonds into common

stock.

Transactions between a bondholder and other investors are not journalized by the issuing corporation.

Chapter 15-12

Illustration: On January 1, 2010, San Marcos HS issues $100,000, three-year, 8% bonds at 100 (100% of face value). Interest is paid annually each Dec. 31.

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

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

Jan. 1 Cash 100,000Bonds payable 100,000

Dec. 31 Interest expense 8,000Cash 8,000

Companies classify bond interest payable as a current liability.

Chapter 15-13

The Real WorldThe Real World

Issuing bonds at a $ amount different from face value is quite common.

(Meaning… a $1,000 bond does not always sell for $1,000.)

http://www.old-stocks-bonds.com/gm-214384a.jpg

Why? 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 (face) rate are the same.

Chapter 15-14

6%

8%

10%

Premium

Face Value

Discount

Assume Contractual (Face) Rate of Assume Contractual (Face) Rate of 8%8%

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


$1,000 Face Value Bonds Sold

At…

Market Interest

Chapter 15-15

Illustration: On January 1, 2010, San Marcos HS issues $100,000, three-year, 8% bonds for $95,027 (95.027% of face value).

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


Jan. 1 Cash 95,027

Discount on bonds payable 4,973

Bonds payable 100,000

Although discount on bonds payable has a debt balance, it is not an asset.

Chapter 15-16

Illustration: On January 1, 2010, San Marcos HS issues $100,000, three-year, 8% bonds for $105,346 (105.346% of face value).

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


Jan. 1 Cash 105,346

Premium on bonds payable 5,346

Bonds payable 100,000

Chapter 15-17

Long-Term Notes Payable

May be secured by a mortgage that pledges title to specific assets as security for a loan

Typically, the terms require the borrower to make installment payments over the term of the loan. Each payment consists of

1. interest on the unpaid balance of the loan and

2. a reduction of loan principal.

Companies initially record mortgage notes payable at face value.

Accounting for Accounting for OtherOther Long-Term Long-Term LiabilitiesLiabilitiesAccounting for Accounting for OtherOther Long-Term Long-Term LiabilitiesLiabilities

LO 4 Describe the accounting for long-term notes payable.

Chapter 15-18

Lease Liabilities - A lease is a contract between a

lessor (owner of the property) and a lessee (renter of the property).

Accounting for Accounting for Other Other Long-Term Long-Term LiabilitiesLiabilitiesAccounting for Accounting for Other Other Long-Term Long-Term LiabilitiesLiabilities

Illustration 15-13

Chapter 15-1 CHAPTER 15 LONG-TERM LIABILITIES Accounting Principles, Eighth Edition.

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Transcript of Chapter 15-1 CHAPTER 15 LONG-TERM LIABILITIES Accounting Principles, Eighth Edition.