Chapter 15-1 Chapter 15 Accounting Principles, Ninth Edition Long-Term Liabilities
Dec 16, 2015
Chapter 15-1
Chapter 15
Accounting Principles, Ninth Edition
Long-Term Liabilities
Chapter 15-2
1. Explain why bonds are issued.
2. Prepare the entries for the issuance of bonds and interest expense.
3. Describe the entries when bonds are redeemed or converted.
4. Describe the accounting for long-term notes payable.
5. Contrast the accounting for operating and capital leases.
6. Identify the methods for the presentation and analysis of long-term liabilities.
Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives
Chapter 15-3
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 Basics Bond IssuesBond IssuesBond IssuesBond Issues Bond Bond RetirementsRetirements
Bond Bond RetirementsRetirements
Other Long-Other Long-Term Term
LiabilitiesLiabilities
Other Long-Other Long-Term 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 15-4
Bonds are a form of interest-bearing notes payable.
Three advantages over common stock:
Bond BasicsBond BasicsBond BasicsBond Basics
SO 1 Explain why bonds are issued.SO 1 Explain why bonds are issued.
1. Stockholder control is not affected.
2. Tax savings result.
3. Earnings per share may be higher.
Chapter 15-5
Effects on earnings per share—stocks vs. bonds.
Bond BasicsBond BasicsBond BasicsBond Basics
SO 1 Explain why bonds are issued.SO 1 Explain why bonds are issued.
Illustration 15-2
Chapter 15-6
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.
QuestionQuestion
Bond BasicsBond BasicsBond BasicsBond Basics
SO 1 Explain why bonds are issued.SO 1 Explain why bonds are issued.
Chapter 15-7
Types of Bonds
Secured and Unsecured (debenture) bonds.
Term and Serial bonds.
Registered and Bearer (or coupon) bonds.
Convertible and Callable bonds.
Bond BasicsBond BasicsBond BasicsBond Basics
SO 1 Explain why bonds are issued.SO 1 Explain why bonds are issued.
Chapter 15-8
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 BasicsBond BasicsBond BasicsBond Basics
SO 1 Explain why bonds are issued.SO 1 Explain why bonds are issued.
Chapter 15-9
Bond BasicsBond BasicsBond BasicsBond Basics
SO 1 Explain why bonds are issued.SO 1 Explain why bonds are issued.
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 15-10
Bond TradingBonds traded on national securities exchanges.
Newspapers and the financial press publish bond prices and trading activity daily.
Bond BasicsBond BasicsBond BasicsBond Basics
SO 1 Explain why bonds are issued.SO 1 Explain why bonds are issued.
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.
Chapter 15-11
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 BasicsBond BasicsBond BasicsBond Basics
SO 1 Explain why bonds are issued.SO 1 Explain why bonds are issued.
The features of a bond (callable, convertible, and so on) affect the market rate of the bond.
Chapter 15-12
6%
8%
10%
Premium
Face Value
Discount
Assume Contractual Rate of 8%Assume Contractual Rate of 8%
Accounting for Bond IssuesAccounting for Bond IssuesAccounting for Bond IssuesAccounting for Bond Issues
SO 2 Prepare the entries for the issuance of bonds and interest expense.
Bonds Sold AtMarket Interest
Chapter 15-13 SO 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.
QuestionQuestion
Accounting for Bond IssuesAccounting for Bond IssuesAccounting for Bond IssuesAccounting for Bond Issues
Chapter 15-14 SO 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.
QuestionQuestion
Accounting for Bond IssuesAccounting for Bond IssuesAccounting for Bond IssuesAccounting for Bond Issues
Chapter 15-15
Illustration: On January 1, 2010, CandlestickCorporation issues $100,000, five-year, 10% bonds at 100 (100% of face value). The entry to record the sale is:
Issuing Bonds at Face ValueIssuing Bonds at Face ValueIssuing Bonds at Face ValueIssuing Bonds at Face Value
SO 2 Prepare the entries for the issuance of bonds and interest expense.
Jan. 1 Cash 100,000
Bonds payable 100,000
Chapter 15-16
Illustration: On January 1, 2010, CandlestickCorporation issues $100,000, five-year, 10% bonds at 100 (100% of face value). Assume that interest ispayable semiannually on January 1 and July 1. Prepare the entry to record the payment of interest on July 1, 2010, assume no previous accrual.
Issuing Bonds at Face ValueIssuing Bonds at Face ValueIssuing Bonds at Face ValueIssuing Bonds at Face Value
SO 2 Prepare the entries for the issuance of bonds and interest expense.
July 1 Bond interest expense 5,000
Cash 5,000
Chapter 15-17
Illustration: On January 1, 2010, CandlestickCorporation issues $100,000, five-year, 10% bonds at 100 (100% of face value). Assume that interest ispayable semiannually on January 1 and July 1. Prepare the entry to record the accrual of interest on December 31, 2010, assume no previous accrual.
Issuing Bonds at Face ValueIssuing Bonds at Face ValueIssuing Bonds at Face ValueIssuing Bonds at Face Value
SO 2 Prepare the entries for the issuance of bonds and interest expense.
Dec. 31 Bond interest expense 5,000
Bond interest payable 5,000
Chapter 15-18
Issuing Bonds at a DiscountIssuing Bonds at a DiscountIssuing Bonds at a DiscountIssuing Bonds at a Discount
SO 2 Prepare the entries for the issuance of bonds and interest expense.
Illustration: On January 1, 2010, Candlestick, Inc. sells $100,000, five-year, 10% bonds for $92,639 (92.639% of face value). Interest is payable on July 1 and January 1. The entry to record the issuance is:Jan. 1 Cash 92,639
Discount on bonds payable 7,361
Bond payable 100,000
Chapter 15-19
Statement PresentationStatement Presentation
Issuing Bonds at a DiscountIssuing Bonds at a DiscountIssuing Bonds at a DiscountIssuing Bonds at a Discount
SO 2 Prepare the entries for the issuance of bonds and interest expense.
Illustration 15-6
Chapter 15-20
Issuing Bonds at a DiscountIssuing Bonds at a DiscountIssuing Bonds at a DiscountIssuing Bonds at a Discount
SO 2 Prepare the entries for the issuance of bonds and interest expense.
Total Cost of BorrowingTotal Cost of Borrowing
Illustration 15-7
Illustration 15-8
Chapter 15-21 SO 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.
QuestionQuestion
Issuing Bonds at a DiscountIssuing Bonds at a DiscountIssuing Bonds at a DiscountIssuing Bonds at a Discount
Chapter 15-22 SO 2 Prepare the entries for the issuance of bonds and interest
expense.
Illustration: On January 1, 2010, Candlestick, Inc. sells $100,000, five-year, 10% bonds for $108,111 (108.111% of face value). Interest is payable on July 1 and January 1. The entry to record the issuance is:Jan. 1 Cash 108,111
Bonds payable 100,000
Premium on bond payable 8,111
Issuing Bonds at a PremiumIssuing Bonds at a PremiumIssuing Bonds at a PremiumIssuing Bonds at a Premium
Chapter 15-23
Statement PresentationStatement Presentation
SO 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.
Issuing Bonds at a PremiumIssuing Bonds at a PremiumIssuing Bonds at a PremiumIssuing Bonds at a Premium
Illustration 15-9
Chapter 15-24 SO 2 Prepare the entries for the issuance of bonds and interest
expense.
Total Cost of BorrowingTotal Cost of Borrowing
Illustration 15-10
Illustration 15-11
Issuing Bonds at a PremiumIssuing Bonds at a PremiumIssuing Bonds at a PremiumIssuing Bonds at a Premium