Long Term Liabilities and Receivables C hapter 14 An electronic presentation by Norman Sunderman Angelo State University An electronic presentation by.
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Long Term Liabilities and Receivables
Chapter14
An electronic presentation by Norman Sunderman Angelo State University
An electronic presentation by Norman Sunderman Angelo State University
$800,000 x 0.12 x 2/12$800,000 x 0.12 x 2/12$800,000 x 0.12 x 2/12$800,000 x 0.12 x 2/12ContinuedContinuedContinuedContinued
Bonds Issued Between Interest Paying Dates
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On July 1, 2007, Grimes Corporation records the semiannual interest payment.
On July 1, 2007, Grimes Corporation records the semiannual interest payment.
Interest Expense 48,000 Cash 48,000
$800,000 x 0.12 x 6/12
Interest Expense
48,000 16,000
Bonds Issued Between Interest Paying Dates
The balance of $32,000 represents the interest cost since the bonds were issued.
32,000
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March 1 Cash 816,000Interest Payable ($800,000 X 0.12 X 6/12) 16,000Bonds Payable 800,000
July 1 Interest Expense ($800,000 X 0.12 X 4/12) $ 32,000Interest Payable 16,000
Cash $ 48,000
Bonds Issued Between Interest Paying Dates
Alternative MethodAlternative Method
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Straight-LineStraight-LineMethodMethod
Straight-LineStraight-LineMethodMethod
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Jet Company sells bonds for $92,976.39 on January 1, 2007. The bonds have a face
value of $100,000 and a 12% stated annual interest rate and a 14% effective rate. Interest is paid semiannually and the bonds mature on December 31, 2011.
Jet Company sells bonds for $92,976.39 on January 1, 2007. The bonds have a face
value of $100,000 and a 12% stated annual interest rate and a 14% effective rate. Interest is paid semiannually and the bonds mature on December 31, 2011.
Cash 92,976.39Discount on Bonds Payable 7,023.61 Bonds Payable 100,000.00
ContinuedContinuedContinuedContinued
Issuing Bonds at a Discount
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Jet Company records the first interest payment on June 30, 2007.
Jet Company records the first interest payment on June 30, 2007.
Interest Expense 6,702.36 Discount on Bonds Payable 702.36 Cash 6,000.00
1. Avoid the downward price pressures on its stock that placing a large new issue of common stock on the market would cause.
2. Avoid the direct sale of common stock when it believes its stock currently is undervalued in the market.
3. Penetrate that segment of the capital market that is unwilling or unable to participate in a direct common stock issue.
4. Minimize the costs associated with selling securities.
Convertible Bonds
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Book value method. Record the stock at the book value of the convertible bonds and do not record a gain or loss. This method is the most widely used.
Market value method. Record the stock at the market value of the stock or debt, whichever is more reliable, and recognize a gain or loss.
Conversion Methods
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Conversion MethodsShannon Corporation has
outstanding convertible bonds with a face value of $10,000 and a book value of $10,500. Each
bond is convertible into 40 shares of $20 par common stock. The
market price is $26.50 per share when the
shares are converted.
Shannon Corporation has outstanding convertible bonds with a face value of $10,000 and a book value of $10,500. Each
bond is convertible into 40 shares of $20 par common stock. The
market price is $26.50 per share when the
shares are converted.
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Book Value Method- The market price is not considered.
Bonds Payable 10,000
Premium on Bonds Payable 500
Common Stock 8,000
Additional-Paid-in Capital-plug 2,500
Book Value Method- The market price is not considered.
Bonds Payable 10,000
Premium on Bonds Payable 500
Common Stock 8,000
Additional-Paid-in Capital-plug 2,500
Market Value Method-Equity accounts equal market price.Bonds Payable 10,000Premium on Bonds Payable 500Loss on Conversion 100
Common Stock 8,000Additional-Paid-in Capital 2,600
Market Value Method-Equity accounts equal market price.Bonds Payable 10,000Premium on Bonds Payable 500Loss on Conversion 100
Common Stock 8,000Additional-Paid-in Capital 2,600
Conversion Methods
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Induced Conversions
A company that has convertible bonds may desire bondholders to convert the bonds to common stock.
A company that has convertible bonds may desire bondholders to convert the bonds to common stock.
To induce conversion, the company may add a “sweetener” to the convertible bond.
To induce conversion, the company may add a “sweetener” to the convertible bond.
The debtor recognizes an expense equal to the fair value
of the “sweetener” and is measured on the date the offer is accepted by the
bondholders.
The debtor recognizes an expense equal to the fair value
of the “sweetener” and is measured on the date the offer is accepted by the
bondholders.
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Induced Conversions
Assume that Harmon Company had $10,000 of outstanding convertible bonds, which had been
issued at par. The original terms of issuance allowed each bond to be converted into 40 shares of no-par
common stock. To induce conversion, the terms were changed to offer 50 shares per bond. All shares were converted when the market price was $30 per share.
Bonds Payable 10,000Bond Conversion Expense 3,000
Common Stock, no par 13,000
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On January 1 of the current year, Johnson Company issues a 3-year, non-interest-bearing note with a face value of $8,000 and receives $5,694.24 in
exchange.
On January 1 of the current year, Johnson Company issues a 3-year, non-interest-bearing note with a face value of $8,000 and receives $5,694.24 in
exchange.
Cash 5,694.24Discount on Notes Payable 2,305.76 Notes Payable 8,000.00
Contra account Contra account to Notes Payableto Notes Payable
Contra account Contra account to Notes Payableto Notes Payable
Notes Payable Issued for Cash
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Johnson Company records the interest expense on the note for the first year.
Johnson Company records the interest expense on the note for the first year.
Interest Expense 683.31 Discount on Notes Payable 683.31
Notes payable $8,000.00 Less: Unamortized discount (2,305.76)Carrying value at beginning of year $5,694.24 x Effective interest rate 0.12 Entry amount $ 683.31
Notes Payable Issued for Cash
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1. No interest is stated, or
2. The stated rate of interest is clearly unreasonable, or
3. The face value of the note is materially different from the cash sales price of the property, goods, or services, or the fair value of the note at the date of the transaction.
APB Opinion No. 21 states that the stipulated rate of interest should be presumed fair. This presumption can be overcome only if--
Notes Payable Exchanged for Property, Goods or Services
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A note receivable is recorded at the fair value of the property, goods, or services or the fair
value of the note, whichever is more reliable.
A note receivable is recorded at the fair value of the property, goods, or services or the fair
value of the note, whichever is more reliable.
Long-Term Notes Receivable
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On January 1, 2007, Marsden Company purchased used equipment from Joyce Company, issuing a 5
year, $10,000 non-interest-bearing note in exchange. Marsden’s incremental interest rate is 12%.
On January 1, 2007, Marsden Company purchased used equipment from Joyce Company, issuing a 5
year, $10,000 non-interest-bearing note in exchange. Marsden’s incremental interest rate is 12%.
Equipment 5,574.27Discount on Notes Payable 4,325.73 Equipment 10,000.00
Long-Term Notes Payable
Present valuePresent value
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Interest Expense 680.91 Discount on Notes Payable 680.91
December 31, 2007
($10,000 ($10,000 –– $4,325.73) x 0.12 $4,325.73) x 0.12($10,000 ($10,000 –– $4,325.73) x 0.12 $4,325.73) x 0.12
Interest Expense 762.62 Discount on Notes Payable 762.62
December 31, 2008
$10,000 $10,000 –– ($4,325.73 ($4,325.73 –– $680.91) x 0.12 $680.91) x 0.12$10,000 $10,000 –– ($4,325.73 ($4,325.73 –– $680.91) x 0.12 $680.91) x 0.12