1、CHAPTER 13LONG-TERM LIABILITIES(cont.) Do not require the use of funds within one year(or the next operating cycle,whichever is longer) Usually arise from major expenditures, such as acquisitions of plant assets,the purchase of another company,or refinancing an existing long-term obligation that is
2、about to mature.LONG-TERM LIABILITIES Relatively few in number but involve large dollar amounts. Examples: bonds, notes, equipment purchase obligations, permanent customer deposits, some obligations under pension and deferred compensation plans, certain types of lease obligations, deferred income ta
3、xes, and some deferred revenue items.Long-term LiabilitiesMeasurement and ValuationRecord long-term liabilities at the fair value of the goods or services received.Interest expense is based on the interest rate on the date of the debt issuance and the balance of the liability.Book value is the of al
4、l future cash payments, discounted at the market interest rate at issuance.Advantages of Issuing Bonds A principal advantage to income taxes. (page234) increase a companys rate of return on equity. (page 235)Types of Bonds (Cont.)(P.235) Term bonds(sinking fund bonds): Bonds that mature in one lump
5、sum on a specified future date. Serial bonds: Bonds that mature in a series of installments at future dates.Types of Bonds(P.236) Registered bonds: keeps a record of the names and addresses of all bondholders and pays interest only to those individuals whose names are on file. Bearer (coupon) bonds:
6、 Unregistered bonds . pays interest to anyone who can show evidence of ownership. Types of Bonds (Cont.)(P.236) Secured bonds(Collateral trust bonds): Bonds usually secured by stocks and bonds of other corporations owned by the issuing company. Unsecured (debenture) bonds: Bonds for which no specifi
7、c collateral has been pledged.Types of Bonds (Cont.)(P.235) Convertible bonds: Bonds that can be converted to other securities at the option of the bondholder.Fargo, Inc.Paid to the bearer of this bond $10,000 at 8 percent annually on January 1 and July 1. $10,000 Types of Bonds (Cont.)(P.235)Junk b
8、onds :High-risk, high-yield bonds issued by companies that are heavily in debt or weak financially.In this chapter, we will discuss the term bonds.Accounting for bonds payable Issue of bonds Semiannual interest payment Adjusting for interest expense Retirement of bonds at maturityBond issued at face
9、 amount The entry: Cash 100 000 Bonds payable 10 000 Page 239240Fargo, Inc.Paid to the bearer of this bond $10,000 at 8 percent annually on January 1 and July 1. $10,000Bond issued at premium or discount Bond Prices at issuance date depends on the relationship between the effective interest rate and
10、 the coupon rate. effective interest rate sometimes is called yield or market rate. coupon rate sometimes is called stated rate.Bond Prices Market rate = stated ratelBonds sell or par value. Market rate stated ratelBonds sell at a (below face value). Market rate stated ratelBonds sell at a (above fa
11、ce value).% Yield Bond issued at premium or discount Example on page 238. The entry would be: (discount) Cash Discount on bonds payable Bonds payableBond issued at premium or discount Example on page 238. The entry would be: (premium) Cash Bonds payable Premium on bonds payablePremium and discount a
12、mortizing Interest method Straight-Line methodInterest Method Interest Expense for each period is calculated as follows: Book Value of Bond at Beginning of Period Market Interest Rate at Date of Bond Issuance =Interest Expense The amortization for the discount or premium is calculated as follows: Ca
13、sh Payment for Interest - Interest Expense =Amortization Amount Interest Method example Page 241242Interest Method QuestionOn 1/1/X9 Graphics Inc. issued $1,000,000, 10%, 5-year bonds at a discount of 92.6395. The bonds pay interest semiannually. The market interest rate was 12%. Using the effective
14、 interest method, what would be the for the first 6 months?a. $60,000.00b. $55,583.70c. $73,605.00d. $46,319.75 Interest Method QuestionOn 1/1/X9 Graphics Inc. issued $1,000,000, 10%, 5-year bonds at a discount of 92.6395. The bonds pay interest semiannually. The market interest rate was 12%. Using
15、the effective interest method, what would be the for the first 6 months?a. $60,000.00b. $55,583.70c. $73,605.00d. $46,319.75 Face Value1,000,000.00$Discount92.6395%Book Value926,395.00 Market Rate (12% 2)6%6 Month Expense55,583.70$ Interest Method QuestionUsing the effective interest method, determi
16、ne the amortization for the discount for the first 6 months?a. $5,583.70b. $55,583.70c. $50,000.00d. $9,664.99 Interest Method QuestionUsing the effective interest method, determine the amortization for the discount for the first 6 months?a. $5,583.70b. $55,583.70c. $50,000.00d. $9,664.99 Interest E
17、xpense$55,583.70Cash Payment- 50,000.00Discount Amortized$ 5,583.70In the previous examples, the bonds were sold on the bond date. But this is not always the case. Are you ready to see what happens when we sell bonds between the bonds interest dates?Bonds Issued Between Interest DatesWhen bonds are
18、sold the interest dates, the bond issuer collects cash for:The cash (or selling) price of the bondsANDThe accrued interest since the last interest payment date.Bonds Issued Between Interest DatesOn 4/1/1995 Graphics Inc. issues 1,000 bonds at face value. The market interest is 10%. The bonds have th
19、e following terms:Face Value = $1,000Maturity Date = 1/1/2000 (5 years)Stated Interest Rate = 10%Interest Dates = 6/30 & 12/31Bond Date = 1/1/1995Bonds Issued Between Interest Dates Selling Price of BondsPV of Bonds at 1/1/1995 Principal (PV of $1, 10, 10%) Interest (PVA of $1, 10, 10%) Total PV $1,
20、000,000 Accrued Interest ($1,000,000 10% 3/12)25,000 Selling Price of Bond1,025,000 Bonds Issued Between Interest DatesWhat does the $25,000 in accrued interest represent for Graphics Inc.?Bonds Issued Between Interest DatesWhat does the $25,000 in accrued interest represent for Graphics Inc.?Intere
21、st PayableBonds Issued Between Interest DatesPrepare the journal entry to record the bond issue on 4/1/1995.GENERAL JOURNALPage 77DateDescriptionPost. Ref.DebitCreditBonds Issued Between Interest DatesPrepare the journal entry to record the bond issue on 4/1/1995.GENERAL JOURNALPage 77DateDescriptio
22、nPost.Ref.DebitCreditApr1 Cash1,025,000 Interest Payable25,000 Bonds Payable1,000,000To record issue of bondsBonds Issued Between Interest DatesPrepare the journal entry to record the bond interest payment on 6/30/1995. GENERAL JOURNALPage 77DateDescriptionPost. Ref.DebitCreditBonds Issued Between Interest DatesPrepare the journal entry to record the bond interest payment on 6/30/1995. GENERAL JOURNALPage 77DateDescriptionPost.Ref.DebitCreditJun 30 Interest Expense50,000Interest Payable25,000 Cash75,000To record bond interest payment
