1. 15-1 Prepared by Coby Harmon University of California, Santa Barbara Westmont College

2. 15-2 15 Learning Objectives After studying this chapter, you should be able to: [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. Long-Term Liabilities

3. 15-3 Preview of Chapter 15 Accounting Principles Eleventh Edition Weygandt Kimmel Kieso

4. 15-4 Bonds are a form of interest-bearing notes payable. Three advantages over common stock: LO 1 Explain why bonds are issued. 1. Stockholder control is not affected. 2. Tax savings result. 3. Return on common stockholders’ equity may be higher. Bond Basics Helpful Hint Besides corporations, governmental agencies and universities also issue bonds to raise capital. Helpful Hint Besides corporations, governmental agencies and universities also issue bonds to raise capital.

5. 15-5 Effects on earnings per share—stocks vs. bonds. LO 1 Explain why bonds are issued. Illustration 15-2 Bond Basics

6. 15-6 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 LO 1 Explain why bonds are issued. Bond Basics

7. 15-7  Secured and Unsecured (debenture) bonds.  Term and Serial bonds.  Registered and Bearer (or coupon) bonds.  Convertible and Callable bonds. LO 1 Explain why bonds are issued. Bond Basics Types of Bonds

8. 15-8  State laws grant corporations the power to issue bonds.  Board of directors and stockholders must approve bond issues.  Board of directors must stipulate number of bonds to be authorized, total face value, and contractual interest rate.  Bond contract known as a bond indenture.  Paper certificate, typically a $1,000 face value. LO 1 Explain why bonds are issued. Bond Basics Issuing Procedures

9. 15-9  Represents a promise to pay: ► sum of money at designated maturity date, plus ► periodic interest at a contractual (stated) rate on the maturity amount (face value).  Interest payments usually made semiannually.  Generally issued when the amount of capital needed is too large for one lender to supply. LO 1 Explain why bonds are issued. Bond Basics Issuing Procedures

10. 15-10 LO 1 Explain why bonds are issued. Maturity Date Maturity Date Contractual Interest Rate Contractual Interest Rate Face or Par Value Face or Par Value Bond Basics Issuer of Bonds Issuer of Bonds Illustration 15-3 Bond certificate

11. 15-11 Determining the Market Value of a Bond LO 1 Explain why bonds are issued. The features of a bond (callable, convertible, and so on) affect the market rate of the bond. Bond Basics Market value is a function of the three factors that determine present value: 1.dollar amounts to be received, 2.length of time until the amounts are received, and 3.market rate of interest.

12. 15-12

13. 15-13 Corporation records bond transactions when it  issues (sells),  retires (buys back) bonds and  when bondholders convert bonds into common stock. NOTE: If bondholders sell their bond investments to other investors, the issuing firm receives no further money on the transaction, nor does the issuing corporation journalize the transaction. Accounting for Bond Issues LO 2 Prepare the entries for the issuance of bonds and interest expense.

14. 15-14 Issue at Par, Discount, or Premium? Accounting for Bond Issues LO 2 Prepare the entries for the issuance of bonds and interest expense. Illustration 15-4 Bond Contractual Interest Rate of 10%

15. 15-15 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. Accounting for Bond Issues Question

16. 15-16 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. Accounting for Bond Issues Question

17. 15-17 Illustration: On January 1, 2014, Candlestick, Inc. issues $100,000, five-year, 10% bonds at 100 (100% of face value). The entry to record the sale is: LO 2 Prepare the entries for the issuance of bonds and interest expense. Jan. 1Cash 100,000 Bonds Payable100,000 Issuing Bonds at Face Value Accounting for Bond Issues

18. 15-18 Illustration: On January 1, 2014, Candlestick, Inc. issues $100,000, five-year, 10% bonds at 100 (100% of face value). Assume that interest is payable semiannually on January 1 and July 1. Prepare the entry to record the payment of interest on July 1, 2014, assume no previous accrual. LO 2 Prepare the entries for the issuance of bonds and interest expense. July 1Interest Expense 5,000 Cash5,000 Issuing Bonds at Face Value

19. 15-19 Illustration: On January 1, 2014, Candlestick, Inc. issues $100,000, five-year, 10% bonds at 100 (100% of face value). Assume that interest is payable semiannually on January 1 and July 1. Prepare the entry to record the accrual of interest on December 31, 2014, assume no previous accrual. LO 2 Prepare the entries for the issuance of bonds and interest expense. Dec. 31Interest Expense 5,000 Interest Payable5,000 Issuing Bonds at Face Value

20. 15-20 LO 2 Prepare the entries for the issuance of bonds and interest expense. Illustration: On January 1, 2014, 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. 1Cash 92,639 Discount on Bonds Payable7,361 Bonds Payable100,000 Accounting for Bond Issues Issuing Bonds at a Discount

21. 15-21 Sale of bonds below face value causes the total cost of borrowing to be more than the bond interest paid. The reason: Borrower is required to pay the bond discount at the maturity date. Thus, the bond discount is considered to be a increase in the cost of borrowing. Statement Presentation LO 2 Prepare the entries for the issuance of bonds and interest expense. Illustration 15-5 Issuing Bonds at a Discount Carrying value or book value

22. 15-22 LO 2 Prepare the entries for the issuance of bonds and interest expense. Total Cost of Borrowing Illustration 15-6 Illustration 15-7 Issuing Bonds at a Discount

23. 15-23 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. LO 2 Prepare the entries for the issuance of bonds and interest expense. Issuing Bonds at a Discount Question

24. 15-24 LO 2 Prepare the entries for the issuance of bonds and interest expense. Jan. 1Cash 108,111 Bonds Payable100,000 Premium on Bonds Payable8,111 Illustration: On January 1, 2014, 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: Accounting for Bond Issues Issuing Bonds at a Premium

25. 15-25 Statement Presentation LO 2 Prepare the entries for the issuance of bonds and interest expense. Sale of bonds above face value causes the total cost of borrowing to be less than the bond interest paid. The reason: The borrower is not required to pay the bond premium at the maturity date of the bonds. Thus, the bond premium is considered to be a reduction in the cost of borrowing. Illustration 15-8 Issuing Bonds at a Premium

26. 15-26 LO 2 Prepare the entries for the issuance of bonds and interest expense. Total Cost of Borrowing Illustration 15-9 Illustration 15-10 Issuing Bonds at a Premium

27. 15-27 Jan. 1Bonds Payable 100,000 LO 3 Describe the entries when bonds are redeemed or converted. Assuming that the company pays and records separately the interest for the last interest period, Candlestick records the redemption of its bonds at maturity as follows: Cash100,000 Accounting for Bond Redemptions Redeeming Bonds at Maturity

28. 15-28 When bonds are retired before maturity, it is necessary to: 1.eliminate carrying value of bonds at redemption date; 2.record cash paid; and 3.recognize 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. LO 3 Describe the entries when bonds are redeemed or converted. Accounting for Bond Redemptions Redeeming Bonds before Maturity

29. 15-29 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. Accounting for Bond Redemptions Question

30. 15-30 Illustration: Assume Candlestick, Inc. has sold its bonds at a premium. At the end of the eighth period, Candlestick retires these bonds at 103 after paying the semiannual interest. The carrying value of the bonds at the redemption date is $101,623. Candlestick makes the following entry to record the redemption at the end of the eighth interest period (January 1, 2018): Bonds Payable 100,000 Premium on Bonds Payable1,623 Loss On Bond Redemption1,377 Cash103,000 LO 3 Describe the entries when bonds are redeemed or converted. Accounting for Bond Redemptions Jan. 1

31. 15-31 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. LO 3 Describe the entries when bonds are redeemed or converted. Accounting for Bond Redemptions Converting Bonds into Common Stock

32. 15-32 Illustration: On July 1, Saunders Associates converts $100,000 bonds sold at face value into 2,000 shares of $10 par value common stock. Both the bonds and the common stock have a market value of $130,000. Saunders makes the following entry to record the conversion: Bonds Payable 100,000 Common Stock (2,000 x $10) 20,000 Paid-in Capital in Excess of Par80,000 LO 3 Describe the entries when bonds are redeemed or converted. Accounting for Bond Redemptions July 1

33. 15-33 When bonds are converted into common stock: a.a gain or loss is recognized. b.the carrying value of the bonds is transferred to paid-in capital accounts. c.the market price of the stock is considered in the entry. d.the market price of the bonds is transferred to paid-in capital. LO 3 Describe the entries when bonds are redeemed or converted. Accounting for Bond Redemptions Question

34. 15-34 May be secured by a mortgage that pledges title to specific assets as security for a loan. Typically, terms require borrower to make installment payments over the term of the loan. Each payment consists of  interest on the unpaid balance of the loan and  a reduction of loan principal. Companies initially record mortgage notes payable at face value. LO 4 Describe the accounting for long-term notes payable. Accounting for Other Long-Term Liabilities Long-Term Notes Payable

35. 15-35 Illustration: Porter Technology Inc. issues a $500,000, 12%, 20- year mortgage note on December 31, 2014. The terms provide for semiannual installment payments of $33,231 (not including real estate taxes and insurance). The installment payment schedule for the first two years is as follows. LO 4 Describe the accounting for long-term notes payable. Illustration 15-11 Accounting for Other Long-Term Liabilities

36. 15-36 LO 4 Describe the accounting for long-term notes payable. Dec. 31Cash 500,000 Mortgage Payable500,000 Jun. 30Interest Expense30,000 Mortgage Payable3,231 Cash33,231 Accounting for Other Long-Term Liabilities Illustration: Porter Technology Inc. issues a $500,000, 12%, 20- year mortgage note on December 31, 2014. The terms provide for semiannual installment payments of $33,231 (not including real estate taxes and insurance). Prepare the entries to record the mortgage and first payment.

37. 15-37 Each payment on a mortgage note payable consists of: a.interest on the original balance of the loan. b.reduction of loan principal only. c.interest on the original balance of the loan and reduction of loan principal. d.interest on the unpaid balance of the loan and reduction of loan principal. LO 4 Describe the accounting for long-term notes payable. Accounting for Other Long-Term Liabilities Question

38. 15-38

39. 15-39 A lease is a contractual arrangement between a lessor (owner of the property) and a lessee (renter of the property). LO 5 Contrast the accounting for operating and capital leases. Illustration 15-12 Accounting for Other Long-Term Liabilities Lease Liabilities

40. 15-40 Operating Lease Capital Lease Journal Entry: Rent Expense xxx Cash xxx Journal Entry: Leased Equipment xxx Lease Liability xxx The issue of how to report leases is the case of substance versus form. Although technically legal title may not pass, the benefits from the use of the property do. A lease that transfers substantially all of the benefits and risks of property ownership should be capitalized (only noncancellable leases may be capitalized). LO 5 Contrast the accounting for operating and capital leases. Accounting for Other Long-Term Liabilities

41. 15-41 To capitalize a lease, one or more of four criteria must be met:  Transfers ownership to the lessee.  Contains a bargain purchase option.  Lease term is equal to or greater than 75 percent of the estimated economic life of the leased property.  The present value of the minimum lease payments (excluding executory costs) equals or exceeds 90 percent of the fair value of the leased property. LO 5 Contrast the accounting for operating and capital leases. Accounting for Other Long-Term Liabilities

42. 15-42 Illustration: Gonzalez Company decides to lease new equipment. The lease period is four years; the economic life of the leased equipment is estimated to be five years. The present value of the lease payments is $190,000, which is equal to the fair market value of the equipment. There is no transfer of ownership during the lease term, nor is there any bargain purchase option. Instructions: a.What type of lease is this? Explain. b.Prepare the journal entry to record the lease. LO 5 Contrast the accounting for operating and capital leases. Accounting for Other Long-Term Liabilities

43. 15-43 Illustration: (a) What type of lease is this? Explain. Capitalization Criteria: 1. 1.Transfer of ownership 2. 2.Bargain purchase option 3. 3.Lease term => 75% of economic life of leased property 4. 4.Present value of minimum lease payments => 90% of FMV of property NO Lease term 4 yrs. Economic life5 yrs. YES 80% YES - PV and FMV are the same. Capital Lease? LO 5 Contrast the accounting for operating and capital leases. Accounting for Other Long-Term Liabilities

44. 15-44 Illustration: (b) Prepare the journal entry to record the lease. LO 5 Contrast the accounting for operating and capital leases. The portion of the lease liability expected to be paid in the next year is a current liability. The remainder is classified as a long-term liability. Leased Asset - Equipment 190,000 Lease Liability190,000 Accounting for Other Long-Term Liabilities

45. 15-45 The lessee must record a lease as an asset if the lease: a.transfers ownership of the property to the lessor. b.contains any purchase option. c.term is 75% or more of the useful life of the leased property. d.payments equal or exceed 90% of the fair market value of the leased property. LO 5 Contrast the accounting for operating and capital leases. Accounting for Other Long-Term Liabilities Question

46. 15-46 LO 6 Identify the methods for the presentation and analysis of long-term liabilities. Illustration 15-13 Statement Presentation and Analysis Presentation

47. 15-47 Two ratios that provide information about debt-paying ability and long-run solvency are:  Debt to Total Assets Ratio  Times Interest Earned LO 6 Identify the methods for the presentation and analysis of long-term liabilities. Statement Presentation and Analysis Analysis

48. 15-48 Illustration: Kellogg had total liabilities of $8,925 million, total assets of $11,200 million, interest expense of $295 million, income taxes of $476 million, and net income of $1,208 million. The higher the percentage of debt to total assets, the greater the risk that the company may be unable to meet its maturing obligations. LO 6 Statement Presentation and Analysis Analysis

49. 15-49 Times interest earned indicates the company’s ability to meet interest payments as they come due. LO 6 Statement Presentation and Analysis Illustration: Kellogg had total liabilities of $8,925 million, total assets of $11,200 million, interest expense of $295 million, income taxes of $476 million, and net income of $1,208 million. Analysis

50. 15-50

51. 15-51 Illustration: Assume that you are willing to invest a sum of money that will yield $1,000 at the end of one year, and you can earn 10% on your money. What is the $1,000 worth today? To compute the answer, 1.divide the future amount by 1 plus the interest rate ($1,000 ÷ 1.10 = $909.09 OR 2.use a Present Value of 1 table. ($1,000 X.90909) = $909.09 (10% per period, one period from now). LO 7 Compute the market price of a bond. Present Value of a Single Amount APPENDIX 15A Present Value Concepts Related to Bond Pricing

52. 15-52 To compute the answer, 1.divide the future amount by 1 plus the interest rate ($1,000 ÷ 1.10 = $909.09. Illustration 15A-1 LO 7 Compute the market price of a bond. APPENDIX 15A Present Value of a Single Amount

53. 15-53 LO 7 Compute the market price of a bond. To compute the answer, 2.use a Present Value of 1 table. ($1,000 X.90909) = $909.09 (10% per period, one period from now). APPENDIX 15A Present Value of a Single Amount

54. 15-54 The future amount ($1,000), the interest rate (10%), and the number of periods (1) are known LO 7 Compute the market price of a bond. Illustration 15A-2 APPENDIX 15A Present Value of a Single Amount

55. 15-55 If you are to receive the single future amount of $1,000 in two years, discounted at 10%, its present value is $826.45 [($1,000 ÷ 1.10) ÷ 1.10]. LO 7 Compute the market price of a bond. APPENDIX 15A Present Value of a Single Amount Illustration 15A-3

56. 15-56 To compute the answer using a Present Value of 1 table. ($1,000 X.82645) = $826.45 (10% per period, two periods from now). LO 7 Compute the market price of a bond. APPENDIX 15A Present Value of a Single Amount

57. 15-57 In addition to receiving the face value of a bond at maturity, an investor also receives periodic interest payments (annuities) over the life of the bonds. To compute the present value of an annuity, we need to know: 1)interest rate, 2)number of interest periods, and 3)amount of the periodic receipts or payments. LO 7 Compute the market price of a bond. APPENDIX 15A Present Value of Interest Payments (Annuities)

58. 15-58 Assume that you will receive $1,000 cash annually for three years and the interest rate is 10%. LO 7 Compute the market price of a bond. Illustration 15A-5 APPENDIX 15A Present Value of Interest Payments (Annuities)

59. 15-59 LO 7 Compute the market price of a bond. Illustration 15A-6 Assume that you will receive $1,000 cash annually for three years and the interest rate is 10%. APPENDIX 15A Present Value of Interest Payments (Annuities)

60. 15-60 LO 7 Compute the market price of a bond. $1,000 annual payment x 2.48685 = $2,486.85 APPENDIX 15A Present Value of Interest Payments (Annuities) Assume that you will receive $1,000 cash annually for three years and the interest rate is 10%.

61. 15-61 Selling price of a bond is equal to the sum of:  Present value of the face value of the bond discounted at the investor’s required rate of return PLUS  Present value of the periodic interest payments discounted at the investor’s required rate of return LO 7 Compute the market price of a bond. APPENDIX 15A Computing the Present Value of a Bond

62. 15-62 Assume a bond issue of 10%, five-year bonds with a face value of $100,000 with interest payable semiannually on January 1 and July 1. Illustration 15A-8 LO 7 Compute the market price of a bond. APPENDIX 15A Computing the Present Value of a Bond

63. 15-63 Illustration 15A-9 LO 7 Compute the market price of a bond. APPENDIX 15A Computing the Present Value of a Bond Assume a bond issue of 10%, five-year bonds with a face value of $100,000 with interest payable semiannually on January 1 and July 1.

64. 15-64 LO 7 Compute the market price of a bond. APPENDIX 15A Computing the Present Value of a Bond Assume a bond issue of 10%, five-year bonds with a face value of $100,000 with interest payable semiannually on January 1 and July 1. Illustration 15A-10

65. 15-65 LO 7 Compute the market price of a bond. APPENDIX 15A Computing the Present Value of a Bond Assume a bond issue of 10%, five-year bonds with a face value of $100,000 with interest payable semiannually on January 1 and July 1. Illustration 15A-11

66. 15-66 Under the effective-interest method, the amortization of bond discount or bond premium results in periodic interest expense equal to a constant percentage of the carrying value of the bonds. Required steps: LO 8 Apply the effective-interest method of amortizing bond discount and bond premium. 1.Compute the bond interest expense. 2.Compute the bond interest paid or accrued. 3.Compute the amortization amount. Effective-Interest Method of Bond Amortization APPENDIX 15B Effective-Interest Method of Bond Amortization

67. 15-67 Illustration: Candlestick, Inc. issues $100,000 of 10%, five-year bonds on January 1, 2014, for $92,639, with interest payable each July 1 and January 1. This results in a discount of $7,361. Illustration 15B-2 LO 8 Apply the effective-interest method of amortizing bond discount and bond premium. Amortizing Bond Discount APPENDIX 15B Effective-Interest Method of Bond Amortization

68. 15-68 Illustration: Candlestick, Inc. issues $100,000 of 10%, five-year bonds on January 1, 2014, for $92,639, with interest payable each July 1 and January 1. This results in a discount of $7,361. Journal entry on July 1, 2014, to record the interest payment and amortization of discount is as follows: Interest Expense 5,558 Cash5,000 Discount on Bonds Payable 558 July 1 LO 8 Apply the effective-interest method of amortizing bond discount and bond premium. APPENDIX 15B Amortizing Bond Discount

69. 15-69 Illustration 15B-4 Illustration: Candlestick, Inc. issues $100,000 of 10%, five-year bonds on January 1, 2014, for $108,111, with interest payable each July 1 and January 1. This results in a premium of $8,111. LO 8 Apply the effective-interest method of amortizing bond discount and bond premium. APPENDIX 15B Amortizing Bond Premium

70. 15-70 Interest Expense 4,324 Cash5,000 Premium on Bonds Payable 676 July 1 Illustration: Candlestick, Inc. issues $100,000 of 10%, five-year bonds on January 1, 2014, for $108,111, with interest payable each July 1 and January 1. This results in a premium of $8,111. Journal entry on July 1, 2014, to record the interest payment and amortization of premium is as follows: LO 8 Apply the effective-interest method of amortizing bond discount and bond premium. APPENDIX 15B Amortizing Bond Premium

71. 15-71 Illustration: Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2014, for $92,639 (discount of $7,361). Interest is payable on July 1 and January 1. Illustration 15C-2 LO 9 Apply the straight-line method of bond discount and bond premium. Amortizing Bond Discount APPENDIX 15C Straight-Line Amortization

72. 15-72 Illustration: Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2014, for $92,639 (discount of $7,361). Interest is payable on July 1 and January 1. The bond discount amortization for each interest period is $736 ($7,361/10). Journal entry on July 1, 2014, to record the interest payment and amortization of discount is as follows: Interest Expense 5,736 Cash5,000 Discount on Bonds Payable 736 July 1 APPENDIX 15C Straight-Line Amortization LO 9 Apply the straight-line method of bond discount and bond premium.

73. 15-73 Illustration: Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2014, for $108,111 (premium of $8,111). Interest is payable on July 1 and January 1. Illustration 15C-4 Amortizing Bond Premium APPENDIX 15C Straight-Line Amortization LO 9 Apply the straight-line method of bond discount and bond premium.

74. 15-74 Illustration: Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2014, for $108,111 (premium of $8,111). Interest is payable on July 1 and January 1. Journal entry on July 1, 2014, to record the interest payment and amortization of discount is as follows: Interest Expense 4,189 Cash5,000 Premium on Bonds Payable 811 July 1 APPENDIX 15C Straight-Line Amortization LO 9 Apply the straight-line method of bond discount and bond premium.

75. 15-75  As indicated in Chapter 11, in general GAAP and IFRS define liabilities similarly.  IFRS requires that companies classify liabilities as current or non-current on the face of the statement of financial position (balance sheet), except in industries where a presentation based on liquidity would be considered to provide more useful information (such as financial institutions). When current liabilities (also called short-term liabilities) are presented, they are generally presented in order of liquidity.  Under IFRS, liabilities are classified as current if they are expected to be paid within 12 months. Key Points A Look at IFRS LO 10 Compare the accounting for long-term liabilities under GAAP and IFRS.

76. 15-76  Similar to GAAP, items are normally reported in order of liquidity. Companies sometimes show liabilities before assets. Also, they will sometimes show non-current (long-term) liabilities before current liabilities.  Under both GAAP and IFRS, preferred stock that is required to be redeemed at a specific point in time in the future must be reported as debt, rather than being presented as either equity or in a “mezzanine” area between debt and equity.  The basic calculation for bond valuation is the same under GAAP and IFRS. In addition, the accounting for bond liability transactions is essentially the same between GAAP and IFRS. Key Points A Look at IFRS LO 10 Compare the accounting for long-term liabilities under GAAP and IFRS.

77. 15-77  IFRS requires use of the effective-interest method for amortization of bond discounts and premiums. GAAP allows use of the straight-line method where the difference is not material. Under IFRS, companies do not use a premium or discount account but instead show the bond at its net amount. For example, if a $100,000 bond was issued at 97, under IFRS a company would record: Cash 97,000 Bonds Payable 97,000 Key Points A Look at IFRS LO 10 Compare the accounting for long-term liabilities under GAAP and IFRS.

78. 15-78  The accounting for convertible bonds differs across IFRS and GAAP, Unlike GAAP, IFRS splits the proceeds from the convertible bond between an equity component and a debt component. The equity conversion rights are reported in equity.  Both Boards share the same objective of recording leases by lessess and lessors according to their economic substance—that is, according to the definitions of assets and liabilities. However, GAAP for leases is much more “rules-based” with specific bright-line criteria (such as the “90% of fair value” test) to determine if a lease arrangement transfers the risks and rewards of ownership; IFRS is more conceptual in its provisions. Rather than a 90% cut-off, it asks whether the agreement transfers substantially all of the risks and rewards associated with ownership. Key Points A Look at IFRS LO 10 Compare the accounting for long-term liabilities under GAAP and IFRS.

79. 15-79 The FASB and IASB are currently involved in two projects, each of which has implications for the accounting for liabilities. One project is investigating approaches to differentiate between debt and equity instruments. The other project, the elements phase of the conceptual framework project, will evaluate the definitions of the fundamental building blocks of accounting. The results of these projects could change the classification of many debt and equity securities. In addition to these projects, the FASB and IASB have also identified leasing as one of the most problematic areas of accounting. A joint project will initially focus primarily on lessee accounting. Looking to the Future A Look at IFRS LO 10 Compare the accounting for long-term liabilities under GAAP and IFRS.

80. 15-80 The accounting for bonds payable is: a)essentially the same under IFRS and GAAP. b)differs in that GAAP requires use of the straight-line method for amortization of bond premium and discount. c)the same except that market prices may be different because the present value calculations are different between IFRS and GAAP. d)not covered by IFRS. IFRS Self-Test Questions A Look at IFRS LO 10 Compare the accounting for long-term liabilities under GAAP and IFRS.

81. 15-81 Under IFRS, if preference shares (preferred stock) have a requirement to be redeemed at a specific point in time in the future, they are treated: a)as a type of asset account. b)as ordinary shares (common stock). c)in the same fashion as other types of preference shares. d)as a liability IFRS Self-Test Questions A Look at IFRS LO 10 Compare the accounting for long-term liabilities under GAAP and IFRS.

82. 15-82 The leasing standards employed by IFRS: a)rely more heavily on interpretation of the conceptual meaning of assets and liabilities than GAAP. b)are more “rules based” than those of GAAP. c)employ the same “bright-line test” as GAAP. d)are identical to those of GAAP. IFRS Self-Test Questions A Look at IFRS LO 10 Compare the accounting for long-term liabilities under GAAP and IFRS.

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