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CHAPTER 14 Long-Term Liabilities ……..…………………………………………………………... Covenants on Long-Term Debt  Liquidity and solvency requirements Current cash debt coverage.

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Presentation on theme: "CHAPTER 14 Long-Term Liabilities ……..…………………………………………………………... Covenants on Long-Term Debt  Liquidity and solvency requirements Current cash debt coverage."— Presentation transcript:

1 CHAPTER 14 Long-Term Liabilities ……..…………………………………………………………... Covenants on Long-Term Debt  Liquidity and solvency requirements Current cash debt coverage ratio Net Cash from Operations Average Current Liabilities = Debt to total assets Total Debt Total Assets =

2 Bond Indenture Underwrite Stated (nominal) Rate Face (maturity) value

3 Debenture Bond Serial Bonds Convertible Bond Deep Discount Bonds Bearer Bonds

4 PeriodsRatePVAnnuityFVAD? What would you pay for a $50,000 bond that matures in 15 years and pays $5,000 a year in interest if you wanted to earn a 12% return? VALUATION OF BONDS PAYABLE Actual rate (10%) < Market rate (12%) Discount

5 PeriodsRatePVAnnuityFVAD? What would you pay for a $50,000, 10-year, 8% bond with interest paid semiannually if the market rate is 7%? Actual rate (8%) > Market rate (7%) Premium

6 Bonds Issues at Premium at Interest Date 1/1/03Issued $50,000, 10-year, 8% bonds. Interest paid every January 1 and July 1. Sold for $53,553 (market rate = 7%). 1/1/03 (To record issuance of bonds)

7 7/1/03 (To record interest payment.) Straight Line Amortization 12/31/03 (To accrue interest on bonds.)

8 Effective Interest Method of Amortization 1/1/03Issued $50,000, 10-year, 8% bonds. Sold for $53,553 (market rate = 7%). 7/1/03 (To record interest payment.) Date Cash Payment Interest (3.5%) Premium Amortiz Carrying Amount 1/1/03 53,553 7/1/03 1/1/04

9 Date Cash Payment Interest (3.5%) Premium Amortiz Carrying Amount 1/1/03 53,553 7/1/03(2,000) 1, ,427 1/1/04(2,000) 1, ,297 12/31/03 Interest Expense Bond Interest Payable Premium on Bonds Pay (To accrue interest on bonds.)

10 BONDS PAYABLE: OTHER ISSUES Bond Issue Costs 7/1/03 Cash20,550 Premium on Bonds Payable790 Unamortized Bond Issue Costs240 (To record issuance of bonds.) 12/31/03 Bonds Payable20,000 (To amortize bond issue costs.)

11 Early Extinguishment of Debt 1/1/03Issued $50,000, 10-year, 8% bonds. Sold for $53,553 (market rate = 7%). Bonds Payable 50,000 Prem. on Bonds 3,553 7/1/ /1/ /1/ /1/04Called the bonds at 108. How much cash paid? What is the unamortized premium?

12 7/1/04 (To record redemption of bonds.) Early Extinguishment of Debt 7/1/04Called the bonds at 108. How much cash paid? What is the unamortized premium?

13 9/1/04 (To accrue interest on bonds.) What if bonds are called 9/1/04, not 7/1/04? Update your records! Date Cash Payment Interest (3.5%) Premium Amortiz Carrying Amount 1/1/04 (2,000)1, ,297 7/1/04(2,000)1, ,162 1/1/05 Determine interest for a full 6-months Record 2-months’ worth.

14 9/1/04 Bonds Payable Premium on Bonds Payable Cash 9/1/04Called the bonds at 108 plus accrued interest of $667. How much cash paid?$54,667 What is the unamortized premium?$3,115

15 NOTES PAYABLE Notes Issued at Below Face Value 1/1/03Issued $50,000, 3-year, non-interest bearing note for $40,024. PeriodsRatePVAnnuityFVAD? 1/1/03 Cash Notes Payable Discount on Notes Payable

16 PeriodsRatePVAnnuityFVAD? Cash Received for Note & Rights $100,000, 3-year, non- interest bearing note the right to buy merchandise at a discount. $100,000 cash GaveReceived Mkt = 8% 1/1/03 Cash Notes Payable Discount on Notes Payable

17 PeriodsRatePVAnnuityFVAD? 64%?-1, ,000N84,274 Property Received for Note $100,000, 3-year, 2% note, semiannual interest Equipment GaveReceived Mkt = 8% 1/1/037/1/03 Interest Expense Cash1,000

18 REPORTING OF LONG-TERM DEBT Off-balance-sheet financing Presentation  motivation  project financing deals  Enron  assets pledged  fair value of debt  future payments for sinking fund requirements  maturity amounts


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