Chapter 15-1 Chapter 15 Long-Term Liabilities Chapter 15-2 Accounting Principles, Ninth Edition Study Study Objectives Objectives Explain why bonds are issued Prepare the entries for the issuance of bonds and interest expense Describe the entries when bonds are redeemed or converted Describe the accounting for long-term notes payable Contrast the accounting for operating and capital leases Identify the methods for the presentation and analysis of long-term liabilities Chapter 15-3 Long-Term Long-Term Liabilities Liabilities Bonds BondsBasics Basics Types of bonds Issuing procedures Trading Market value Chapter 15-4 Bond BondIssues Issues Issuing bonds at face value Discount or premium Issuing bonds at a discount Issuing bonds at a premium Bond Bond Retirements Retirements Redeeming bonds at maturity Redeeming bonds before maturity Converting bonds into common stock Other OtherLongLongTerm Term Liabilities Liabilities Statement Statement Presentation Presentation and andAnalysis Analysis Long-term notes payable Lease liabilities Presentation Analysis Bond Bond Basics Basics Bonds are a form of interest-bearing notes payable Three advantages over common stock: Stockholder control is not affected Tax savings result Earnings per share may be higher Chapter 15-5 SO Explain why bonds are issued Bond Bond Basics Basics Effects on earnings per share—stocks vs bonds Illustration 15-2 Chapter 15-6 SO Explain why bonds are issued Bond Bond Basics Basics Question The major disadvantages resulting from the use of bonds are: Chapter 15-7 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 SO Explain why bonds are issued Bond Bond Basics Basics 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 SO Explain why bonds are issued Bond Bond Basics Basics 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 SO Explain why bonds are issued Bond Bond Basics Basics Issuer Issuer of of Bonds Bonds Illustration 15-3 Maturity Maturity Date Date Contractual Contractual Interest Interest Rate Rate Chapter 15-10 Face Face or or Par Par Value Value SO Explain why bonds are issued Present Present Value Value Concepts Concepts Related Related to to Bond Bond Pricing Pricing Present Value of Interest Payments (Annuities) Assume that you will receive $1,000 cash annually for three years and the interest rate is 10% Illustration 15A-6 Chapter 15-57 SO Compute the market price of a bond Present Present Value Value Concepts Concepts Related Related to to Bond Bond Pricing Pricing Present Value of Interest Payments (Annuities) Assume that you will receive $1,000 cash annually for three years and the interest rate is 10% $1,000 annual payment x 2.48685 = $2,486.85 Chapter 15-58 SO Compute the market price of a bond Present Present Value Value Concepts Concepts Related Related to to Bond Bond Pricing Pricing Computing the Present Value of a Bond The selling price of a bond is equal to the sum of: 1) The present value of the face value of the bond discounted at the investor’s required rate of return PLUS 2) The present value of the periodic interest payments discounted at the investor’s required rate of return Chapter 15-59 SO Compute the market price of a bond Present Present Value Value Concepts Concepts Related Related to to Bond Bond Pricing Pricing Assume a bond issue of 10%, five-year bonds with a face value of $100,000 with interest payable semiannually on January and July Illustration 15A-8 Chapter 15-60 SO Compute the market price of a bond Present Present Value Value Concepts Concepts Related Related to to Bond Bond Pricing Pricing Assume a bond issue of 10%, five-year bonds with a face value of $100,000 with interest payable semiannually on January and July Illustration 15A-9 Contractual Rate = Discount Rate Chapter 15-61 Issued at Face Value SO Compute the market price of a bond Present Present Value Value Concepts Concepts Related Related to to Bond Bond Pricing Pricing Assume a bond issue of 10%, five-year bonds with a face value of $100,000 with interest payable semiannually on January and July Illustration 15A-10 Contractual Rate < Discount Rate Chapter 15-62 Issued at a Discount SO Compute the market price of a bond Present Present Value Value Concepts Concepts Related Related to to Bond Bond Pricing Pricing Assume a bond issue of 10%, five-year bonds with a face value of $100,000 with interest payable semiannually on January and July Illustration 15A-11 Contractual Rate > Discount Rate Chapter 15-63 Issued at a Premium SO Compute the market price of a bond Effective-Interest Effective-Interest Method Method of of Bond Bond Amortization Amortization Appendix 15B Under the effective-interest method, the amortization of bond discount or bond premium results in period interest expense equal to a constant percentage of the carrying value of the bonds Required steps: Compute the bond interest expense Compute the bond interest paid or accrued Compute the amortization amount Chapter 15-64 SO Apply the effective-interest method of amortizing bond discount and bond premium Effective-Interest Effective-Interest Method Method of of Bond Bond Amortization Amortization Amortizing Bond Discount Assume Candlestick, Inc issues $100,000 of 10%, five-year bonds on January 1, 2010, for $92,639, with interest payable each July and January This results in a discount of $7,361 Illustration 15B-2 Chapter 15-65 SO Apply the effective-interest method of amortizing bond discount and bond premium Effective-Interest Effective-Interest Method Method of of Bond Bond Amortization Amortization Amortizing Bond Discount Assume Candlestick, Inc issues $100,000 of 10%, five-year bonds on January 1, 2010, for $92,639, with interest payable each July and January This results in a discount of $7,361 Journal entry on July 1, 2010, to record the interest payment and amortization of discount is as follows: July Interest Expense Cash 5,000 Discount on Bonds Payable Chapter 15-66 5,558 558 SO Apply the effective-interest method of amortizing bond discount and bond premium Effective-Interest Effective-Interest Method Method of of Bond Bond Amortization Amortization Amortizing Bond Premium Assume Candlestick, Inc issues $100,000 of 10%, five-year bonds on January 1, 2010, for $108,111, with interest payable each July and January This results in a premium of $8,111 Illustration 15B-4 Chapter 15-67 SO Apply the effective-interest method of amortizing bond discount and bond premium Effective-Interest Effective-Interest Method Method of of Bond Bond Amortization Amortization Amortizing Bond Premium Assume Candlestick, Inc issues $100,000 of 10%, five-year bonds on January 1, 2010, for $108,111, with interest payable each July and January This results in a premium of $8,111 Journal entry on July 1, 2010, to record the interest payment and amortization of premium is as follows: July Interest Expense 4,324 Premium on Bonds Payable 676 Cash Chapter 15-68 5,000 SO Apply the effective-interest method of amortizing bond discount and bond premium Straight-Line Straight-Line Amortization Amortization Amortizing Bond Discount Appendix 15C Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2010, for $92,639 (discount of $7,361) Interest is payable on July and January The bond discount amortization for each interest period is $736 ($7,361/10) Illustration 15C-2 Chapter 15-69 SO Apply the straight-line method of amortizing bond discount and bond premium Straight-Line Straight-Line Amortization Amortization Amortizing Bond Discount Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2010, for $92,639 (discount of $7,361) Interest is payable on July and January The bond discount amortization for each interest period is $736 ($7,361/10) Journal entry on July 1, 2010, to record the interest payment and amortization of discount is as follows: July Interest Expense Discount on Bonds Payable Cash Chapter 15-70 5,736 736 5,000 SO Apply the straight-line method of amortizing bond discount and bond premium Copyright Copyright “Copyright © 2009 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.” Chapter 15-71 .. .Chapter 15 Long-Term Liabilities Chapter 15- 2 Accounting Principles, Ninth Edition Study Study Objectives Objectives Explain... the market rate of the bond Chapter 15- 12 SO Explain why bonds are issued Accounting Accounting for for Bond Bond Issues Issues Assume Contractual Rate of 8% Chapter 15- 13 Market Interest Bonds... per share may be higher Chapter 15- 5 SO Explain why bonds are issued Bond Bond Basics Basics Effects on earnings per share—stocks vs bonds Illustration 15- 2 Chapter 15- 6 SO Explain why bonds