CHAPTER 15 BONDS, LEASES AND MORTGAGES PAYABLE HFT 2403 CHAPTER 15 BONDS, LEASES AND MORTGAGES PAYABLE

BONDS PAYABLE Long term liabilities over one year Holders of the bonds are creditors, not owners Bond holders receive interest for their investment

SALE OF BONDS Underwriting Premium – above face value Resellers Premium – above face value Discount – below face value Saleable in secondary markets Normally sold at face value of $1,000 Bond indenture Contractual provisions of the bond

Advantages and Disadvantage of Bond Financing Fixed rate Less risk to bondholders Bondholders have no control in business operation Tax advantages Disadvantages Interest must be paid Maturity date Fixed charge

Classification of Bonds Term bonds Paid in one lump sum Sinking fund Serial bonds Paid off in installments Mortgage bonds Specific collateral Debenture bonds Pledged by the assets of the company Registered bonds Bondholder is registered owner Coupon bonds Also called bearer bonds

Discounts and Premiums Contra-liability account Discount represents additional interest expense Amortized over the life of the bond Premium Added to bonds payable balance Reduction of interest expense

Convertible Bonds Can be converted to stock at a fixed price The best of both worlds Company – lower interest rate Bondholder Security of a fixed investment Potential of ownership Conversion parity price

Leases Operating leases Capital leases Lessor (owner) Lessee (renter) Right to use without the potential of ownership Capital leases Potential for ownership Allows for transferability of ownership at some point in time Bargain purchase option in the lease Life of the lease is greater than 75% of the economic life of the asset The present value of the minimum lease payments equals 90% or more of the property’s market value

Pensions Defined Contribution Defined Benefits Employers and employees contribute fixed amounts Benefits are based on accumulated values Defined Benefits Based on an estimated future amount

Mortgages Payable Loan collateralized by fixed property Building Land Payment is usually principal and interest Long term liability

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