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Chapter 15-1. Chapter 15-2 CHAPTER 15 LONG-TERM LIABILITIES Accounting Principles, Eighth Edition

Dec 16, 2015

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  • Slide 1
  • Chapter 15-1
  • Slide 2
  • Chapter 15-2 CHAPTER 15 LONG-TERM LIABILITIES Accounting Principles, Eighth Edition
  • Slide 3
  • Chapter 15-3 1. 1.Explain why bonds are issued. 2. 2.Prepare the entries for the issuance of bonds and interest expense. 3. 3.Describe the entries when bonds are redeemed or converted. 4. 4.Describe the accounting for long-term notes payable. 5. 5.Contrast the accounting for operating and capital leases. 6. 6.Identify the methods for the presentation and analysis of long-term liabilities. Study Objectives
  • Slide 4
  • Chapter 15-4 Issuing bonds at face value Discount or premium Issuing bonds at a discount Issuing bonds at a premium Bonds Basics Accounting for Bond Issues Accounting for Bond Retirements Accounting for Other Long-Term Liabilities Statement Presentation and Analysis Types of bonds Issuing procedures Trading Market value Redeeming bonds at maturity Redeeming bonds before maturity Converting bonds into common stock Long-term notes payable Lease liabilities PresentationAnalysis Long-Term Liabilities
  • Slide 5
  • Chapter 15-5 Bonds are a form of interest-bearing notes payable. Three advantages over common stock: Bond Basics LO 1 Explain why bonds are issued. 1. Stockholder control is not affected. 2. Tax savings result. 3. Earnings per share may be higher.
  • Slide 6
  • Chapter 15-6 Effects on earnings per sharestocks vs. bonds. Bond Basics LO 1 Explain why bonds are issued. Illustration 15-2
  • Slide 7
  • Chapter 15-7 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. Question Bond Basics LO 1 Explain why bonds are issued.
  • Slide 8
  • Chapter 15-8 Types of Bonds Secured and Unsecured (debenture) bonds. Term and Serial bonds. Registered and Bearer (or coupon) bonds. Convertible and Callable bonds. Bond Basics LO 1 Explain why bonds are issued.
  • Slide 9
  • Chapter 15-9 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. Bond Basics LO 1 Explain why bonds are issued.
  • Slide 10
  • Chapter 15-10 Bond Basics LO 1 Explain why bonds are issued. Issuer of Bonds Issuer of Bonds Maturity Date Maturity Date Illustration 15-3 Contractual Interest Rate Contractual Interest Rate Face or Par Value Face or Par Value
  • Slide 11
  • Chapter 15-11 Bond Trading Bonds traded on national securities exchanges. Newspapers and the financial press publish bond prices and trading activity daily. Bond Basics LO 1 Explain why bonds are issued. Illustration 15-4 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.
  • Slide 12
  • Chapter 15-12 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. Bond Basics LO 1 Explain why bonds are issued. The features of a bond (callable, convertible, and so on) affect the market rate of the bond.
  • Slide 13
  • Chapter 15-13 6% 8% 10% Premium Face Value Discount Assume Contractual Rate of 8% Accounting for Bond Issues LO 2 Prepare the entries for the issuance of bonds and interest expense. Bonds Sold AtMarket Interest
  • Slide 14
  • Chapter 15-14 LO 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. Question Accounting for Bond Issues
  • Slide 15
  • Chapter 15-15 LO 2 Prepare the entries for the issuance of bonds and interest 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. Question Accounting for Bond Issues
  • Slide 16
  • Chapter 15-16 Illustration: On January 1, 2008, 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 Value LO 2 Prepare the entries for the issuance of bonds and interest expense. Jan. 1Cash 100,000 Bonds payable100,000 Dec. 31Interest expense8,000 Cash8,000
  • Slide 17
  • Chapter 15-17 Illustration: On January 1, 2008, San Marcos HS issues $100,000, three-year, 8% bonds for $95,027 (95.027% of face value). Issuing Bonds at a Discount LO 2 Prepare the entries for the issuance of bonds and interest expense. Jan. 1Cash 95,027 Discount on bonds payable4,973 Bonds payable100,000
  • Slide 18
  • Chapter 15-18 Statement Presentation Issuing Bonds at a Discount LO 2 Prepare the entries for the issuance of bonds and interest expense.
  • Slide 19
  • Chapter 15-19 LO 2 Prepare the entries for the issuance of bonds and interest 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. Question Issuing Bonds at a Discount
  • Slide 20
  • Chapter 15-20 Illustration: On January 1, 2008, San Marcos HS issues $100,000, three-year, 8% bonds for $105,346 (105.346% of face value). Issuing Bonds at a Premium LO 2 Prepare the entries for the issuance of bonds and interest expense. Jan. 1Cash 105,346 Premium on bonds payable5,346 Bonds payable100,000
  • Slide 21
  • Chapter 15-21 Statement Presentation Issuing Bonds at a Discount LO 2 Prepare the entries for the issuance of bonds and interest expense. 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.
  • Slide 22
  • Chapter 15-22 Redeeming Bonds at Maturity Accounting for Bond Retirements LO 3 Describe the entries when bonds are redeemed or converted. San Marcos HS records the redemption of its bonds at maturity as follows: Bonds payable 100,000 Cash100,000
  • Slide 23
  • Chapter 15-23 Redeeming Bonds before Maturity When a company retires bonds before maturity, it is necessary to: 1.eliminate the carrying value of the bonds at the redemption date; 2.record the cash paid; and 3.recognize the gain or loss on redemption. The carrying value of the bonds is the face value of the bonds less unamortized bond discount or plus unamortized bond premium at the redemption date. Accounting for Bond Retirements LO 3 Describe the entries when bonds are redeemed or converted.
  • Slide 24
  • Chapter 15-24 LO 3 Describe the entries when bonds are redeemed or converted. When bonds are redeemed before maturity, the gain or loss on redemption is the difference between the cash paid and the: a.carrying value of the bonds. b.face value of the bonds. c.original selling price of the bonds. d.maturity value of the bonds. Question Accounting for Bond Retirements
  • Slide 25
  • Chapter 15-25 Illustration: The San Marcos HS, 8% bonds of $100,000 issued on Jan. 1, 2008, are recalled at 105 on Dec. 31, 2009. Assume that the carrying value of the bonds at the redemption date is $98,183. Journal entry at Dec. 31, 2009: Bonds payable 100,000 Loss on bond redemption6,817 Cash ($100,000 x 105%) 105,000 Discount on bonds payable1,817 Accounting for Bond Retirements LO 3 Describe the entries when bonds are redeemed or converted.
  • Slide 26
  • Chapter 15-26 Converting Bonds into Common Stock Until conversion, the bondholder receives interest on the bond. For the issuer, the bonds sell at a higher price and pay a lower rate of interest than comparable debt securities without the conversion option. Upon conversion, the company transfers the carrying value of the bonds to paid-in capital accounts. No gain or loss is recognized. Accounting for Bond Retirements LO 3 Describe the entries when bonds are redeemed or converted.
  • Slide 27
  • Chapter 15-27 E15-6 Nocioni Company issued $1,000,000 of bonds on January 1, 2008. Instructions: Prepare the journal entry to record the conversion of the bonds into 30,000 shares of $10 par value common stock. Assume the bonds were issued at par. Bonds payable 1,000,000 Common stock (30,000 x $10) 300,000 Paid-in capital in excess of par700,000 Accounting for Bond Retirements LO 3 Describe the entries when bonds are redeemed or converted.
  • Slide 28
  • Chapter 15-28 When bonds
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