1. Slide 10-1

2. Slide 10-2 Chapter 10 Liabilities Financial Accounting, Seventh Edition

3. Slide 10-3 1. 1.Explain a current liability, and identify the major types of current liabilities. 2. 2.Describe the accounting for notes payable. 3. 3.Explain the accounting for other current liabilities. 4. 4.Explain why bonds are issued, and identify the types of bonds. 5. 5.Prepare the entries for the issuance of bonds and interest expense. 6. 6.Describe the entries when bonds are redeemed or converted. 7. 7.Describe the accounting for long-term notes payable. 8. 8.Identify the methods for the presentation and analysis of long-term liabilities. Study Objectives

4. Slide 10-4 Current Liabilities Notes payable Sales taxes payable Payroll and payroll taxes Unearned revenues Current maturities of long- term debt Statement presentation and analysis Bond basics Accounting for bond issues Accounting for bond retirements Accounting for long-term notes payable Statement presentation and analysis Long-Term Liabilities LiabilitiesLiabilities

5. Slide 10-5 Current liability is debt with two key features: 1. Company expects to pay the debt from existing current assets or through the creation of other current liabilities. 2. Company will pay the debt within one year or the operating cycle, whichever is longer. What is a Current Liability? SO 1 Explain a current liability, and identify the major types of current liabilities. Current liabilities include notes payable, accounts payable, unearned revenues, and accrued liabilities such as taxes payable, salaries payable, and interest payable. Section 1 Current Liabilities

6. Slide 10-6 To be classified as a current liability, a debt must be expected to be paid: a.out of existing current assets. b.by creating other current liabilities. c.within 2 years. d.both (a) and (b). Question SO 1 Explain a current liability, and identify the major types of current liabilities. What is a Current Liability?

7. Slide 10-7 SO 2 Describe the accounting for notes payable. Notes Payable Written promissory note. Require the borrower to pay interest. Issued for varying periods. What is a Current Liability?

8. Slide 10-8 Illustration: On March 1, 2011, Cole Williams borrows $100,000 from First National Bank on a 4-month, 12% note. Instructions a)Prepare the entry on March 1. b)Prepare the adjusting entry on June 30, assuming monthly adjusting entries have not been made. c)Prepare the entry at maturity (July 1). SO 2 Describe the accounting for notes payable. What is a Current Liability?

9. Slide 10-9 Illustration: On March 1, 2011, Cole Williams borrows $100,000 from First National Bank on a 4-month, 12% note. a)Prepare the entry on March 1. Notes payable100,000 Cash100,000 Interest payable4,000 Interest expense4,000 $100,000 x 12% x 4/12 = $4,000 b)Prepare the adjusting entry on June 30. SO 2 Describe the accounting for notes payable. What is a Current Liability?

10. Slide 10-10 Illustration: On March 1, 2011, Cole Williams borrows $100,000 from First National Bank on a 4-month, 12% note. c) Prepare the entry at maturity (July 1). Interest payable4,000 Notes payable100,000 Cash104,000 SO 2 Describe the accounting for notes payable. What is a Current Liability?

11. Slide 10-11 SO 3 Explain the accounting for other current liabilities. Sales Tax Payable Sales taxes are expressed as a stated percentage of the sales price. Either rung up separately or included in total receipts. Retailer collects tax from the customer. Retailer remits the collections to the state’s department of revenue. What is a Current Liability?

12. Slide 10-12 Illustration: The March 25 cash register reading for Cooley Grocery shows sales of $10,000 and sales taxes of $600 (sales tax rate of 6%), the journal entry is: Sales10,000 Cash10,600 Sales tax payable600 SO 3 Explain the accounting for other current liabilities. What is a Current Liability?

13. Slide 10-13 The term “payroll” pertains to both: Salaries - managerial, administrative, and sales personnel (monthly or yearly rate). Wages - store clerks, factory employees, and manual laborers (rate per hour). Determining the payroll involves computing three amounts: (1) gross earnings, (2) payroll deductions, and (3) net pay. SO 3 Explain the accounting for other current liabilities. Payroll and Payroll Taxes Payable What is a Current Liability?

14. Slide 10-14 Illustration: Assume a corporation records its payroll for the week of March 7 as follows: Salaries and wages expense100,000 Federal income tax payable21,864 FICA tax payable7,650 State income tax payable2,922 Salaries and wages payable67,564 SO 3 Explain the accounting for other current liabilities. Cash67,564 Salaries and wages payable 67,564Mar. 11 Record the payment of this payroll on March 11. Mar. 7 What is a Current Liability?

15. Slide 10-15 Payroll tax expense results from three taxes that governmental agencies levy on employers. These taxes are: FICA tax Federal unemployment tax State unemployment tax SO 3 Explain the accounting for other current liabilities. What is a Current Liability?

16. Slide 10-16 Illustration: Based on the corporation’s $100,000 payroll, the company would record the employer’s expense and liability for these payroll taxes as follows. Payroll tax expense13,850 Federal unemployment tax payable800 FICA tax payable7,650 State unemployment tax payable 5,400 SO 3 Explain the accounting for other current liabilities. What is a Current Liability?

17. Slide 10-17 Employer payroll taxes do not include: a.Federal unemployment taxes. b.State unemployment taxes. c.Federal income taxes. d.FICA taxes. Question SO 3 Explain the accounting for other current liabilities. What is a Current Liability?

18. Slide 10-18

19. Slide 10-19 SO 3 Explain the accounting for other current liabilities. Unearned Revenue Revenues that are received before the company delivers goods or provides services. What is a Current Liability? 1.Company debits Cash, and credits a current liability account (unearned revenue). 2.When the company earns the revenue, it debits the Unearned Revenue account, and credits a revenue account.

20. Slide 10-20 Illustration: Assume that Superior University sells 10,000 season football tickets at $50 each for its five-game home schedule. The university makes the following entry for the sale of season tickets: SO 3 Explain the accounting for other current liabilities. Unearned revenue500,000 Cash 500,000Aug. 6 Ticket revenue100,000 Unearned revenue 100,000Sept. 7 As the school completes each of the five home games, it would record the revenue earned. What is a Current Liability?

21. Slide 10-21 Current Maturities of Long-Term Debt Portion of long-term debt that comes due in the current year. No adjusting entry required. SO 3 Explain the accounting for other current liabilities. What is a Current Liability?

22. Slide 10-22 Statement Presentation and Analysis Illustration 10-5 SO 3

23. Slide 10-23 Working capital is calculated as: a.current assets minus current liabilities. b.total assets minus total liabilities. c.long-term liabilities minus current liabilities. d.both (b) and (c). Question Statement Presentation and Analysis SO 3 Explain the accounting for other current liabilities.

24. Slide 10-24 Liquidity refers to the ability to pay maturing obligations and meet unexpected needs for cash. The current ratio permits us to compare the liquidity of different-sized companies and of a single company at different times. Illustration 10-7 Illustration 10-6 Statement Presentation and Analysis SO 3 Explain the accounting for other current liabilities. Analysis

25. Slide 10-25 Bonds are a form of interest-bearing notes payable. Three advantages over common stock: SO 4 Explain why bonds are issued, and identify the types of bonds. 1. Stockholder control is not affected. 2. Tax savings result. 3. Earnings per share may be higher. Section 2 Long-Term Liabilities Bond Basics

26. Slide 10-26 Effects on earnings per share—stocks vs. bonds. Illustration 10-9 Bond Basics SO 4 Explain why bonds are issued, and identify the types of bonds.

27. Slide 10-27 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 SO 4 Explain why bonds are issued, and identify the types of bonds.

28. Slide 10-28 Types of Bonds Secured and Unsecured (debenture) bonds. Term and Serial bonds. Registered and Bearer (or coupon) bonds. Convertible and Callable bonds. Bond Basics SO 4 Explain why bonds are issued, and identify the types of bonds.

29. Slide 10-29 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 SO 4 Explain why bonds are issued, and identify the types of bonds.

30. Slide 10-30 Bond Basics Issuer of Bonds Issuer of Bonds Maturity Date Maturity Date Illustration 10-10 Contractual Interest Rate Contractual Interest Rate Face or Par Value Face or Par Value DUE 2013 2013 SO 4

31. Slide 10-31 Bond Trading Bonds traded on national securities exchanges. Newspapers and the financial press publish bond prices and trading activity daily. Read as: Outstanding 5.125%, $1,000 bonds that mature in 2014. 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. Bond Basics SO 4 Explain why bonds are issued, and identify the types of bonds.

32. Slide 10-32 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. The features of a bond (callable, convertible, and so on) affect the market rate of the bond. Bond Basics SO 4 Explain why bonds are issued, and identify the types of bonds.

33. Slide 10-33 SO 4 Explain why bonds are issued, and identify the types of bonds.

34. Slide 10-34 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 SO 4 Explain why bonds are issued, and identify the types of bonds.

35. Slide 10-35 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 SO 4 Explain why bonds are issued, and identify the types of bonds.

36. Slide 10-36 Illustration: On January 1, 2011, Candlestick Corporation issues $100,000, five-year, 10% bonds at 100 (100% of face value). The entry to record the sale is: Jan. 1Cash 100,000 Bonds payable100,000 Accounting for Bond Issues Issuing Bonds at Face Value SO 4 Explain why bonds are issued, and identify the types of bonds.

37. Slide 10-37 Illustration: On January 1, 2011, Candlestick Corporation 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, 2011, assume no previous accrual. July 1Bond interest expense 5,000 Cash5,000 Issuing Bonds at Face Value SO 4 Explain why bonds are issued, and identify the types of bonds.

38. Slide 10-38 Illustration: On January 1, 2011, Candlestick Corporation 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, 2011, assume no previous accrual. Dec. 31Bond interest expense 5,000 Bond interest payable5,000 Issuing Bonds at Face Value SO 4 Explain why bonds are issued, and identify the types of bonds.

39. Slide 10-39 6% 8% 10% Premium Face Value Discount Assume Contractual Rate of 8% SO 5 Prepare the entries for the issuance of bonds and interest expense. Bonds Sold AtMarket Interest Accounting for Bond Issues

40. Slide 10-40 SO 5 Prepare the entries for the issuance of bonds and interest expense. Illustration: On January 1, 2011, 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 Bond payable100,000 Accounting for Bond Issues Issuing Bonds at a Discount

41. Slide 10-41 Statement Presentation SO 5 Prepare the entries for the issuance of bonds and interest expense. Illustration 10-13 Issuing Bonds at a Discount

42. Slide 10-42 SO 5 Prepare the entries for the issuance of bonds and interest expense. Total Cost of Borrowing Illustration 10-14 Illustration 10-15 Issuing Bonds at a Discount

43. Slide 10-43 SO 5 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

44. Slide 10-44 SO 5 Prepare the entries for the issuance of bonds and interest expense. Illustration: On January 1, 2011, 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. 1Cash 108,111 Bonds payable100,000 Premium on bond payable8,111 Accounting for Bond Issues Issuing Bonds at a Premium

45. Slide 10-45 Statement Presentation SO 5 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. Illustration 10-16 Issuing Bonds at a Premium

46. Slide 10-46 SO 5 Prepare the entries for the issuance of bonds and interest expense. Total Cost of Borrowing Illustration 10-17 Illustration 10-18 Issuing Bonds at a Premium

47. Slide 10-47 Redeeming Bonds at Maturity SO 6 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: Bond payable 100,000 Cash100,000 Accounting for Bond Retirements

48. Slide 10-48 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. SO 6 Describe the entries when bonds are redeemed or converted. Accounting for Bond Retirements

49. Slide 10-49 SO 6 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

50. Slide 10-50 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, 2015): Bonds payable 100,000 Premium on bonds payable1,623 Loss on redemption1,377 Cash103,000 SO 6 Describe the entries when bonds are redeemed or converted. Accounting for Bond Retirements

51. Slide 10-51 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. SO 6 Describe the entries when bonds are redeemed or converted. Accounting for Bond Retirements

52. Slide 10-52 Illustration: Assume that 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 SO 6 Describe the entries when bonds are redeemed or converted. Accounting for Bond Retirements

53. Slide 10-53 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. Question SO 6 Describe the entries when bonds are redeemed or converted. Accounting for Bond Retirements

54. Slide 10-54 Long-Term Notes Payable May be secured by a mortgage that pledges title to specific assets as security for a loan Typically, the terms require the borrower to make installment payments over the term of the loan. Each payment consists of 1.interest on the unpaid balance of the loan and 2.a reduction of loan principal. Companies initially record mortgage notes payable at face value. SO 7 Describe the accounting for long-term notes payable. Accounting for Long-Term Notes Payable

55. Slide 10-55 Illustration: Porter Technology Inc. issues a $500,000, 12%, 20-year mortgage note on December 31, 2011. 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. SO 7 Describe the accounting for long-term notes payable. Illustration 10-19 Accounting for Long-Term Notes Payable

56. Slide 10-56 SO 7 Describe the accounting for long-term notes payable. Illustration: Porter Technology Inc. issues a $500,000, 12%, 20-year mortgage note on December 31, 2011. 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. Dec. 31Cash 500,000 Mortgage notes payable500,000 Jun. 30Interest expense30,000 Mortgage notes payable3,231 Cash33,231 Accounting for Long-Term Notes Payable

57. Slide 10-57 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. Question SO 7 Describe the accounting for long-term notes payable. Accounting for Long-Term Notes Payable

58. Slide 10-58

59. Slide 10-59 Presentation SO 8 Identify the methods for the presentation and analysis of long-term liabilities. Statement Presentation and Analysis Illustration 10-20

60. Slide 10-60 Analysis Two ratios that provide information about debt- paying ability and long-run solvency are: Total debt Total assets Debt to total assets = The higher the percentage of debt to total assets, the greater the risk that the company may be unable to meet its maturing obligations. 1. SO 8 Identify the methods for the presentation and analysis of long-term liabilities. Statement Presentation and Analysis

61. Slide 10-61 Two ratios that provide information about debt- paying ability and long-run solvency are: Income before income taxes and interest expense Interest expense Times interest earned = Indicates the company’s ability to meet interest payments as they come due. 2. SO 8 Identify the methods for the presentation and analysis of long-term liabilities. Analysis Statement Presentation and Analysis

62. Slide 10-62 Illustrate: Kellogg Company had total liabilities of $8,871 million, total assets of $11,397 million, interest expense of $319 million, income taxes of $444 million, and net income of $1,103 million. SO 8 Identify the methods for the presentation and analysis of long-term liabilities. Analysis Illustration 10-21 Statement Presentation and Analysis

63. Slide 10-63

64. Slide 10-64  For employers, the average cost of healthcare benefits per employee is about $6,700 per year.  The rate of increase of employer healthcare costs has slowed somewhat as employers raised the employee share of premiums and raised deductibles (the amount of a bill that the employee pays before insurance coverage begins).  In 2008, it is estimated that the percentage of persons that did not have health insurance was 14.5% (43.3 million) for persons of all ages. Approximately 19.4% of persons under 65 years of age were covered by public health plans, and 65.5% were covered by private insurance. Your Boss Wants to Know if you Ran Today

65. Slide 10-65  Government is expected to become the largest source of funding for health care by 2016 and is projected to pay more than half of all national health spending by 2018.  As a percentage of payroll, the employer cost of health benefits has exploded over the past few decades. In addition, employer health costs for manufacturing firms in the U.S., $2.38 per worker per hour, were much higher than the foreign trade- weighted average of $0.96 per worker per hour in 2005. Employer health costs make the U.S. less competitive than it could otherwise be.

66. Slide 10-66  The costs and performance of America ’ s healthcare system are putting workers and companies at a “ significant disadvantage ” in the global marketplace. The Business Roundtable, whose member companies provide healthcare plans for more than 35 million Americans, finds that compared with people in Canada, Japan, Germany, the United Kingdom, and France, Americans receive 23% less value from their healthcare system. When compared with emerging competitors like Brazil, India, and China, the U.S. receives 46% less value. This study finds that for every $1 the U.S. spends on health care, its five leading competitors spend $0.63, and the emerging competitors just $0.15. The study also notes that “ on the whole, our workforce is not as healthy ” as that of either group of competitors.

67. Slide 10-67 As the graph below shows, private health insurance, such as that provided by employers, pays for less than half of healthcare costs in the U.S. If employers continue to cut their healthcare benefits, more of the burden will shift to the government or to individuals as out-of- pocket costs.

68. Slide 10-68 Suppose you own a business. About a quarter of your employees smoke, and an even higher percentage are overweight. You decide to implement a mandatory health program that requires employees to quit smoking and to exercise regularly, with regular monitoring. If employees do not participate in the program, they will have to pay their own insurance premiums. Is this fair? YES: It is the responsibility of management to try to maximize a company’s profit. Employees with unhealthy habits drive up the cost of health insurance because they require more frequent and more costly medical attention. NO: What people do on their own time is their own business. This represents an invasion of privacy, and is a form of discrimination.

69. Slide 10-69 To illustrate present value concepts, 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, divide the future amount by 1 plus the interest rate ($1,000/1.10 = $909.09 OR use a Present Value of 1 table. ($1,000 X.90909) = $909.09 (10% per period, one period from now). SO 9 Compute the market price of a bond. Present Value Concepts Related to Bond Pricing Appendix 10A Present Value of Face Value

70. Slide 10-70 To compute the answer, divide the future amount by 1 plus the interest rate ($1,000/1.10 = $909.09. Present Value Concepts Related to Bond Pricing Present Value of Face Value Illustration 10A-1 SO 9 Compute the market price of a bond.

71. Slide 10-71 To compute the answer, use a Present Value of 1 table. ($1,000 X.90909) = $909.09 (10% per period, one period from now). Present Value Concepts Related to Bond Pricing Present Value of Face Value SO 9 Compute the market price of a bond. TABLE 10A-1

72. Slide 10-72 The future amount ($1,000), the interest rate (10%), and the number of periods (1) are known Present Value Concepts Related to Bond Pricing Present Value of Face Value SO 9 Compute the market price of a bond. Illustration 10A-2

73. Slide 10-73 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]. Present Value Concepts Related to Bond Pricing Present Value of Face Value SO 9 Compute the market price of a bond. Illustration 10A-3

74. Slide 10-74 To compute the answer using a Present Value of 1 table. ($1,000 X.82645) = $826.45 (10% per period, two periods from now). Present Value Concepts Related to Bond Pricing Present Value of Face Value SO 9 Compute the market price of a bond. TABLE 10A-1

75. Slide 10-75 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. SO 9 Compute the market price of a bond. Present Value Concepts Related to Bond Pricing Present Value of Interest Payments (Annuities)

76. Slide 10-76 Assume that you will receive $1,000 cash annually for three years and the interest rate is 10%. SO 9 Compute the market price of a bond. Present Value Concepts Related to Bond Pricing Present Value of Interest Payments (Annuities) Illustration 10A-5

77. Slide 10-77 Assume that you will receive $1,000 cash annually for three years and the interest rate is 10%. SO 9 Compute the market price of a bond. Present Value Concepts Related to Bond Pricing Present Value of Interest Payments (Annuities) Illustration 10A-6

78. Slide 10-78 Assume that you will receive $1,000 cash annually for three years and the interest rate is 10%. SO 9 Compute the market price of a bond. Present Value Concepts Related to Bond Pricing Present Value of Interest Payments (Annuities) $1,000 annual payment x 2.48685 = $2,486.85 TABLE 10A-2

79. Slide 10-79 SO 9 Compute the market price of a bond. Present Value Concepts Related to Bond Pricing Computing the Present Value of a Bond The selling price of a bond is equal to the sum of: 1)The present value of the face value of the bond discounted at the investor’s required rate of return PLUS 2)The present value of the periodic interest payments discounted at the investor’s required rate of return

80. Slide 10-80 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 10A-8 SO 9 Compute the market price of a bond. Present Value Concepts Related to Bond Pricing

81. Slide 10-81 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 10A-9 SO 9 Compute the market price of a bond. Present Value Concepts Related to Bond Pricing Contractual Rate = Discount Rate Issued at Face Value

82. Slide 10-82 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 10A-10 SO 9 Compute the market price of a bond. Present Value Concepts Related to Bond Pricing Contractual Rate < Discount Rate Issued at a Discount

83. Slide 10-83 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 10A-11 SO 9 Compute the market price of a bond. Present Value Concepts Related to Bond Pricing Contractual Rate > Discount Rate Issued at a Premium

84. Slide 10-84 Under the effective-interest method, the amortization of bond discount or bond premium results in period interest expense equal to a constant percentage of the carrying value of the bonds. Required steps: SO 10 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 10B

85. Slide 10-85 Assume Candlestick, Inc. issues $100,000 of 10%, five-year bonds on January 1, 2011, for $92,639, with interest payable each July 1 and January 1. This results in a discount of $7,361. Illustration 10B-2 Amortizing Bond Discount Effective-Interest Method of Bond Amortization SO 10 Apply the effective-interest method of amortizing bond discount and bond premium.

86. Slide 10-86 Assume Candlestick, Inc. issues $100,000 of 10%, five-year bonds on January 1, 2011, 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, 2011, to record the interest payment and amortization of discount is as follows: Effective-Interest Method of Bond Amortization SO 10 Apply the effective-interest method of amortizing bond discount and bond premium. Interest Expense 5,558 Cash5,000 Discount on Bonds Payable 558 July 1 Amortizing Bond Discount

87. Slide 10-87 Illustration 10B-4 Effective-Interest Method of Bond Amortization SO 10 Apply the effective-interest method of amortizing bond discount and bond premium. Amortizing Bond Premium Assume Candlestick, Inc. issues $100,000 of 10%, five-year bonds on January 1, 2011, for $108,111, with interest payable each July 1 and January 1. This results in a premium of $8,111.

88. Slide 10-88 Effective-Interest Method of Bond Amortization SO 10 Apply the effective-interest method of amortizing bond discount and bond premium. Interest Expense 4,324 Cash5,000 Premium on Bonds Payable 676 July 1 Amortizing Bond Premium Assume Candlestick, Inc. issues $100,000 of 10%, five-year bonds on January 1, 2011, 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, 2011, to record the interest payment and amortization of premium is as follows:

89. Slide 10-89 Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2011, 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). Illustration 10C-2 Amortizing Bond Discount Straight-Line Amortization SO 11 Apply the straight-line method of amortizing bond discount and bond premium. Appendix 10C

90. Slide 10-90 Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2011, 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, 2011, 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 Amortizing Bond Discount Straight-Line Amortization SO 11 Apply the straight-line method of amortizing bond discount and bond premium.

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