CHAPTER 8 LONG TERM LIABILITIES 8 1 Bond 8 2 Other Long Term liabilities 8 3 Presentation and Disclosure FINANCIAL ACCOUNTING 2 CHAPTER 8 LONG TERM LIABILITIES OBJECTIVE After studying this chapter, y[.]
CHAPTER 8: LONG-TERM LIABILITIES 8.1 Bond 8.2 Other Long-Term liabilities 8.3 Presentation and Disclosure FINANCIAL ACCOUNTING CHAPTER 8: LONG-TERM LIABILITIES OBJECTIVE: After studying this chapter, you should be able to: Identify Bond and accounting for Bond Recognition and accounting for other long-term liabilities Understand the requirement of disclosure of long-term liabilities FINANCIAL ACCOUNTING 8.1 Bond 8.1.1 Types of bond 8.1.2 Accounting for bond FINANCIAL ACCOUNTING 8.1.1 TYPES OF BOND 38 BOND DEFINITION Bonds are a form of interest-bearing notes payable to obtain large amounts of long-term capital Corporate management usually must decide whether to issue common stock (equity financing) or bonds FINANCIAL ACCOUNTING 8.1.1 TYPES OF BOND 39 Issuing Procedures In authorizing the bond issue, the board of directors must stipulate the number of bonds to be authorized, total face value, and contractual interest rate The face value is the amount of principal the issuing company must pay at the maturity date The maturity date is the date that the final payment is due to the investor from the issuing company The contractual interest rate(stated rate): is the rate used to determine the amount of cash interest the borrower pays and the investor receives FINANCIAL ACCOUNTING 8.1.1 TYPES OF BONDS 40 TYPES OF BONDS SECURED AND UNSECURED BONDS TERM AND SERIAL BONDS REGISTERED AND BEARER BONDS CONVERTIBLE AND CALLABLE BONDS NORMAL BOND, DEEP DISCOUNT BOND, ZERO COUPON BOND FINANCIAL ACCOUNTING 8.1.2 Accounting for bond 8.1.2.1 Accounting for bond at issuing date 8.1.2.2 Accounting for interest of bond 8.1.2.3 Accounting for bond at maturity date 41 FINANCIAL ACCOUNTING 8.1.2 Accounting for bond 8.1.2.1 Accounting for bond at issuing date -Issued at par -Issued at discount -Issued at premium 42 FINANCIAL ACCOUNTING ISSUED AT PAR 43 ISSUE PRICE = FACE VALUE Accounting treatment at issuing date: Dr Cash: face value Cr Bonds Payable: face value In SOFP, bonds payable is in the long-term liabilities FINANCIAL ACCOUNTING ISSUED AT DISCOUNT 44 ISSUE PRICE < FACE VALUE: DISCOUNTED BOND Accounting treatment at issuing date: Dr Cash: issue price Dr Discount on Bonds Payable Cr Bonds Payable: face value In SOFP, bonds payable is in the long-term liabilities Accounting treatment at each year end (straight line method): Dr Interest expense (borrowing cost) Cr Discount on Bonds Payable FINANCIAL ACCOUNTING 8.1.2.3 ACCOUNTING FOR BOND AT MATURITY DATE 49 At Maturity Date: In General, A company often retire bonds at the maturity date which was stated on bond certificate Before Maturity Date: A company may decide to retire bonds before maturity to reduce interest cost and to remove debt from its SOFP A company can retire debt early only if it has sufficient cash resources FINANCIAL ACCOUNTING 8.1.2.3 ACCOUNTING FOR BOND AT MATURITY DATE 50 At Maturity Date Regardless of the issue price of bonds, the book value of the bonds at maturity will equal their face value The journal entry is: Dr Bond Payable: face value Cr Cash: face value FINANCIAL ACCOUNTING 8.1.2.3 ACCOUNTING FOR BOND REDEEMPTION BEFORE MATURITY DATE 51 Before Maturity Date (1) Eliminate the carrying value of the bonds at the redemption date; (2) Record the cash paid (3) Recognize the gain or loss on redemption FINANCIAL ACCOUNTING 8.1.2.3 ACCOUNTING FOR BOND REDEEMPTION BEFORE MATURITY DATE 52 Before Maturity Date Dr Bonds Payable: face value Dr Premium on Bonds Payable : carrying amount of bond- face value Dr Loss on Bond Redemption: balance Cr Cash: Redeemable value Cr Gain on Bond Redemption: balance FINANCIAL ACCOUNTING 8.2 Other Long-Term liabilities 8.2.1 Long-term note payables 8.2.2 Long-term loan FINANCIAL ACCOUNTING 8.2.1 LONG-TERM NOTES PAYABLE 54 Long-term notes payable are interest-bearing notes payable, the term of the notes exceeds one year A long-term note may be secured by a mortgage that pledges title to specific assets as security for a loan Example: approximately 18% of McDonald’s long-term debt related to mortgage notes on land, buildings, and improvements FINANCIAL ACCOUNTING ... BOND FINANCIAL ACCOUNTING 8. 1 .2 Accounting for bond 8. 1 .2. 1 Accounting for bond at issuing date 8. 1 .2. 2 Accounting for interest of bond 8. 1 .2. 3 Accounting for bond at maturity date 41 FINANCIAL ACCOUNTING. .. Gain on Bond Redemption: balance FINANCIAL ACCOUNTING 8 .2 Other Long-Term liabilities 8 .2. 1 Long-term note payables 8 .2. 2 Long-term loan FINANCIAL ACCOUNTING 8 .2. 1 LONG-TERM NOTES PAYABLE 54 Long-term... disclosure of long-term liabilities FINANCIAL ACCOUNTING 8. 1 Bond 8. 1.1 Types of bond 8. 1 .2 Accounting for bond FINANCIAL ACCOUNTING 8. 1.1 TYPES OF BOND 38 BOND DEFINITION Bonds are a form of