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Chapter 15-1 Chapter 15 Accounting Principles, Ninth Edition Long-Term Liabilities.

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Presentation on theme: "Chapter 15-1 Chapter 15 Accounting Principles, Ninth Edition Long-Term Liabilities."— Presentation transcript:

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2 Chapter 15-1 Chapter 15 Accounting Principles, Ninth Edition Long-Term Liabilities

3 Chapter Explain why bonds are issued Prepare the entries for the issuance of bonds and interest expense Describe the entries when bonds are redeemed or converted Describe the accounting for long-term notes payable Contrast the accounting for operating and capital leases Identify the methods for the presentation and analysis of long-term liabilities. Study Objectives

4 Chapter 15-3 Issuing bonds at face value Discount or premium Issuing bonds at a discount Issuing bonds at a premium Bonds Basics Bond Issues Bond Retirements Other Long- Term Liabilities Statement Presentation and Analysis Types of bonds Issuing procedures Trading Market value Redeeming bonds at maturity Redeeming bonds before maturity Converting bonds into common stock Long-term notes payable Lease liabilities PresentationAnalysis Long-Term Liabilities

5 Chapter 15-4 Bonds are a form of interest-bearing notes payable. Three advantages over common stock: Bond Basics SO 1 Explain why bonds are issued. 1. Stockholder control is not affected. 2. Tax savings result. 3. Earnings per share may be higher.

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

7 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. Question Bond Basics SO 1 Explain why bonds are issued.

8 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 Basics SO 1 Explain why bonds are issued.

9 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 Basics SO 1 Explain why bonds are issued.

10 Chapter 15-9 Bond Basics SO 1 Explain why bonds are issued. Issuer of Bonds Issuer of Bonds Maturity Date Maturity Date Illustration 15-3 Contractual Interest Rate Contractual Interest Rate Face or Par Value Face or Par Value

11 Chapter Bond Trading Bonds traded on national securities exchanges. Newspapers and the financial press publish bond prices and trading activity daily. Bond Basics SO 1 Explain why bonds are issued. Read as: Outstanding 5.125%, $1,000 bonds that mature in Currently yield a 5.747% return. On this day, $33,965,000 of these bonds were traded. Closing price was % of face value, or $

12 Chapter 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 Basics SO 1 Explain why bonds are issued. The features of a bond (callable, convertible, and so on) affect the market rate of the bond.

13 Chapter % 8% 10% Premium Face Value Discount Assume Contractual Rate of 8% Accounting for Bond Issues SO 2 Prepare the entries for the issuance of bonds and interest expense. Bonds Sold AtMarket Interest

14 Chapter 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. Question Accounting for Bond Issues

15 Chapter 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. Question Accounting for Bond Issues

16 Chapter Illustration: On January 1, 2010, Candlestick Corporation issues $100,000, five-year, 10% bonds at 100 (100% of face value). The entry to record the sale is: Issuing Bonds at Face Value SO 2 Prepare the entries for the issuance of bonds and interest expense. Jan. 1Cash 100,000 Bonds payable100,000

17 Chapter Illustration: On January 1, 2010, 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, 2010, assume no previous accrual. Issuing Bonds at Face Value SO 2 Prepare the entries for the issuance of bonds and interest expense. July 1Bond interest expense 5,000 Cash5,000

18 Chapter Illustration: On January 1, 2010, 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, 2010, assume no previous accrual. Issuing Bonds at Face Value SO 2 Prepare the entries for the issuance of bonds and interest expense. Dec. 31Bond interest expense 5,000 Bond interest payable5,000

19 Chapter Issuing 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. 1Cash 92,639 Discount on bonds payable7,361 Bond payable100,000

20 Chapter Statement Presentation Issuing Bonds at a Discount SO 2 Prepare the entries for the issuance of bonds and interest expense. Illustration 15-6

21 Chapter Issuing Bonds at a Discount SO 2 Prepare the entries for the issuance of bonds and interest expense. Total Cost of Borrowing Illustration 15-7 Illustration 15-8

22 Chapter 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. Question Issuing Bonds at a Discount

23 Chapter 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 ( % 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 Issuing Bonds at a Premium

24 Chapter Statement 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 Premium Illustration 15-9

25 Chapter SO 2 Prepare the entries for the issuance of bonds and interest expense. Total Cost of Borrowing Illustration Illustration Issuing Bonds at a Premium


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