06/01/2014

Accounting Principles
Non-current liabilities, debentures
payable and classification of
liabilities on the balance sheet

Learning objectives

Journalise transactions for unsecured notes payable and

mortgages payable

Describe debentures payable: their different types, prices and

interest rates

Measure interest expense and account for premiums and

discounts on debentures using the straight-line amortisation
method

Report liabilities on the balance sheet

Unsecured notes payable and mortgages payable

Unsecured notes are borrowings that are not secured by any

legal charge over the assets of the borrower

They are often repayable in instalments

Mortgages payable are long-term debts that are backed with a

legal charge (a mortgage) over land

The mortgage will state that the borrower promises to transfer

the legal title to the property if the mortgage is not paid on
schedule

Like long-term notes payable, the total mortgage payable

amount will have a portion due within one year (current) and a
portion that is due more than one year from a specific date

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Unsecured notes payable and mortgages payable

The principal portion of the total mortgage payable that is due

within one year is current

To calculate the amount of each payment to apply to the

mortgage payable and how much is interest expense, we create
an amortisation schedule

An amortisation schedule details each loan payments allocation

between principal and interest

Unsecured notes payable and mortgages payable

Unsecured notes payable and mortgages payable

Date

Account title

Dr

Dec 31

Mortgage payable (L)

1 228.91

Current portion of mortgage payable

(L+)

Jan 31

1 228.91

Interest expense
($100 075 0.06 1/12) (E+)

500.38

Mortgage payable
($600.00 $500.38) (L)

99.62

Cash (A)

Cr

600.00

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Unsecured notes payable and mortgages payable

Date

Account title

Dr

Dec 31

Mortgage payable
($1 304.73 $1 228.91) (L)

75.82

Current portion of mortgage payable

(L+)

Cr

75.82

Debentures: An introduction

Debentures (sometimes called bonds payable) are borrowings

from multiple lenders, called debenture holders

Under the Australian Corporations Act, the term debenture may

be used only to describe loans secured by a legal charge over
assets of the borrower

Term debentures (the most common type) all mature at the

same specified time

Serial debentures mature in instalments at regular intervals

Debentures: An introduction

Each debenture holder receives a debenture certificate that

shows the name of the company that borrowed the money

The certificate states the principal, which is the amount

borrowed

The company must then pay each debenture holder the

principal amount at a specific future date, called the maturity
date

The debenture certificate states the interest rate that the

company will pay and the dates the interest is due

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Debenture prices

A debenture can be issued at any price agreed upon by the

issuer and the debenture holders

There are three basic categories of debenture prices

- Maturity (or par or face) value
- A discount, a price below maturity (par) value
- A premium, a price above maturity (par) value

The issue price of a debenture does not affect the required

payment at maturity

As a debenture approaches maturity, its market price moves

towards maturity value

Present value

Money earns income over time, a fact called the time value of
money

The amount that a person would invest at the present time is

called the present value. The present value is the debentures
market price

Debenture interest rates

Debentures are sold at their market price, which is the present

value of the interest payments the debenture holder will receive
while holding the debenture plus the debenture principal paid at
the end of the debentures life

The stated interest rate determines the amount of cash interest

the borrower pays each year

The market interest rate is the rate that investors demand to

earn for lending their money

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Debenture interest rates

Interaction of the stated interest rate & the market interest rate to
determine the price of a debenture
Example : Debenture with a stated interest rate of 9%
Debentures
stated
interest rate

Market
interest
rate

Issue price of debentures

9%

= 9%

Maturity Value of the debenture

9%

< 10%

Discount (price below maturity

value)

9%

> 8%

Premium (price above maturity

value)

Issuing debentures at maturity (par) value

Date

Account title

Dr

Jan 1

Cash (A+)

100000

Debentures payable (L+)

Cr
100000

Issued debentures.

Jun 30

Interest expense ($100 000 0.09 612)

(E+)

4500

Cash (A)

4500

Paid half-yearly interest.

Jan 1

Debentures payable (L)

100000

Cash (A)

100000

Repaid debentures at maturity.

Issuing debentures at a discount

Date

Account title

Dr

Jan 1

Cash ($100000 0.96149)

96149

Discount on debentures

3851

Debentures payable

Cr

100000

Issued debentures at a discount.

Jun 30

Interest expense (E+)

4885

Cash ($100 000 0.09 6 12) (A)

4500

Discount on debentures (3 851 1/5 years

6 12) (CL)

385

Paid half-yearly interest and amortised

discount.

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Issuing debentures at a discount

Date

Account title

Dr

Jan 1

Debentures payable (L)

100000

Cash (A)

Cr
100000

Repaid debentures at maturity.

Issuing debentures at a premium

Date

Account title

Dr

Jan 1

Cash ($100 000 1.041) (A+)

104100

Cr

Debentures payable (L+)

100000

Premium on debentures (AL+)

4100

Issued debentures at a premium.

Jun 30

Interest expense (E+)

4090

Premium on debentures ($4100 1/5

years 612) (AL)

410

Cash ($100000 0.09 612) (A)

4500

Paid interest and amortised premium.

Adjusting entries for debentures

Date

Account title

Dr

Dec 31

Interest expense (E+)

2050

Cr

Interest payable ($100000 0.08 312)

(L+)

2000

Discount on debentures ($2000/10 312)

(CL)

50

Accrued interest and amortised discount.

Mar 31

Interest payable (from 31 Dec) (L)

2000

Interest expense (E+)

2050

Cash ($100000 0.08 612) (A)

4000

Discount on debentures ($2000/10 312)

(CL)

50

Paid interest and amortised discount.

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Issuing debentures between interest dates

Date

Account title

Dr

Apr 1

Cash (A+)

101500

Cr

Debentures payable (L+)

100000

Interest payable ($100000 0.06 312)

(L+)

1500

Issued debentures three months after the

planned issue date of the debentures.
Jun 30

Interest payable (from 1 April) (L)

1500

Interest expense (for April, May, June)

(E+)

1500

Cash ($100000 0.06 612) (A)

3000

Paid interest.

Reporting liabilities on the balance sheet

Summary:

Unsecured notes are borrowings that are not secured by any

legal charge over the assets of the borrower

Mortgages payable are long-term debts that are backed with a

legal charge (a mortgage) over land

Debentures (sometimes called bonds payable) are borrowings

from multiple lenders

A debenture can be issued at any price agreed upon by the

issuer and the debenture holders