Principles of Financial Accounting-Chinese

CHAPTER
Financing: Long-Term Liabilities

10
LO1 Measuring Long-Term Liabilities
LO2 Accounting for Long-Term Liabilities
LO3 The Nature of Bonds
LO4 Using Debt-Related Financial Ratios
Expanded Material
LO5 Bonds Issued at a Discount or at a Premium

What is a Liability? LO1

(current liability)
(non-current liability)
2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
3
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Current liability is debt with two key features:

1. A debt that the company expects to pay within one year or
the operating cycle, whichever is longer
2. Most companies pay current liabilities by using current
assets.
Current liabilities include notes payable, accounts payable, unearned

revenues, and accrued liabilities such as taxes payable, salaries
payable, and interest payable.
4
Non-Current liability:
Obligations that are expected to be paid after one year.

Notes payable Mortgages payable
Bonds
5
Measuring Long-Term Liabilities
Present Value and Future Value Concepts LO1
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?

Assume that Coronet, Inc. issues a zero-interest bond with a

face value of $1,000,000 due in 20 years. How many would you
pay for this bond?
the market value of the bond
distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6
Congratulations! You have a winning lottery ticket and the stat

has provided you with three possible options for payment:
1. receive $9,000,000 in three years.
2. receive $7,000,000 immediately.
3. receive $3,000,000 at the end of each year for three years.
Which of these options would you select?
=> A million dollars received 20 years from now is not the same as
a million dollars received today.
=> Time value of money
7
Future Value
$100 5%

i=5%
PV=100 FV=?
Present Value
$1055%

discounting
8
Future Value
The value in the future of $100 to be received or paid
today, given a specified interest rate.
Present Value Future Amount

(Known) (Computed)
$90.91 $100
(One-Year Period @ 10%)
$100 is the future value of the $90.91 present value.
9
Present Value
The value today of $100 to be received or paid in the
future, given a specified interest rate.
Present Value Future Amount

(Computed) (Known)
$90.91 $100
(One-Year Period @ 10%)
$90.91 is the present value of the $100 future amount.
10
Compound interest
interest is added to the principal.
=>
EX. $100 5%

0 1 2 3
i=5% i=5% i=5%
PV=100 FV=?
11
Computing the Present Value of a Single Amount

Assume that $10,000 is to be paid four years from today
when the interest rate is 10%.
Present Value Table (Appendix D, Table )
Period 7% 8% 9% 10% 12%
1 0.9346 0.9259 0.9174 0.9091 0.8929
$1
2 0.8734 0.8573 0.8417 0.8264 0.7972
10%
3 0.8163 0.7938 0.7722 0.7513 0.7118
$0.6830
4 0.7629 0.7350 0.7084 0.6830 0.6355
12
Computing the Future Value of a Single Amount

Assume that we have a savings account with a current
balance of $6,830 that earns interest of 10%.
Future Value Table (Appendix D, Table )
Period 7% 8% 9% 10% 12%
1 1.0700 1.0800 1.0900 1.1000 1.1200
2 1.1449 1.1664 1.1881 1.2100 1.2544
$1
3
10%
1.2250 1.2597 1.2950 1.3310 1.4049
$1.4641
4 1.3108 1.3605 1.4116 1.4641 1.5735
13
Compounding Period
Assume that the 10% interest had been compounded
semiannually (twice a year) for four years.
Rate: 10% 5% (10% )
Period: 4 years 8 periods (4 2)
What is the present value of $10,000 to be paid in four

years if interest of 10% is compounded semiannually?
14
Compounding Period
Likewise, if semiannual compounding is used to
determine the future value of $6,768 in four years at
10% compounded semiannually, the result is as follows:
Earn more interest than the

annual compounding
($6,830) does.
15
Formula for Interest Rate
Yearly interest rate Interest rate

= per compounding period
Compounding periods per year
Formula For Number of Interest Periods
Compounding Number of
Number of years =
periods per year interest periods
16
Computing the Present Value of an Annuity LO1

annuity
EX.
Annuity is a series of equal amounts to be received or paid

at the end of equal time periods
Assume that $10,000 is to be paid at the end of each of
the next 10 years:
17
EX. $1005%

0 1 2 3
i=5% i=5% i=5%
100 100 100 FV=?
18
If the interest rate is 12% compounded annually, the

present value factor is 5.6502.
Present Value of an Annuity Table (Appendix D, Table )

Period 7% 8% 9% 10% 12%

8 5.9713 5.7466 5.5348 5.3349 4.9676
9 6.5152 6.2469 5.9952 5.7590 5.3282
10 7.0236 6.7101 6.4177 6.1446 5.6502
19
Computing Periodic Payments

Assume a monthly payment on an automobile loan of
$20,000 if the interest rate is 12% compounded monthly
(i.e., 1% per month)
Loan period is 60 months.
20
Computing Periodic Payments
$20,000 = Payment 44.9550

Payment = $20,000 / 44.9550
Payment = $444.89
21
For the lottery ticket example, which of these options

would you select?
1. receive $9,000,000 in three years.
2. receive $7,000,000 immediately.
3. receive $3,000,000 at the end of each year for three

years.
So you need to know the PV.
22
Do This LO1
Compute the following values:

1. The present value of a single payment of $12,000 to be
made five years from today at a 6% interest rate
FV = $12,000; i = 6%; N = 5 PV = $8,967.6
2. The future value in five years of $2,000 invested today at

a 4% interest rate
PV = $2,000; i = 4%; N = 5 FV = $2,433.4
23
Do This LO1
3. The present value of 10 equal annual payments of $500

at an 8% interest rate
PMT = $500; i = 8%; N = 10 PV = $3,355.05
4. The payment associated with a loan of $20,000 to be

repaid with equal monthly payments over a five-year
period at an interest rate of 12% compounded monthly
PV = $20,000; i = 1%; N = 60 PMT = $444.89
24
Accounting for Long-Term Liabilities
Accounting for Long-Term Liabilities LO2
Business Issues Involved with Long-Term Liabilities
Exhibit 10.2
Accounting for Long-Term Liabilities LO2
Types of Financing
Notes payable
Mortgages payable
Bonds
26
Interest-Bearing Notes LO2
Illustration
Assume that on January 1, 2012, Giraffe Company
borrowed $10,000 from City Bank for three years at
10% interest. Assume also that Interest is payable
annually on December 31.
Jan. 1, Cash 10,000
2012 Notes Payable 10,000
Dec. 31, Interest Expense 1,000

2012 Cash 1,000
27
Illustration

2013
Cash 1,000

2014 10,000
Notes Payable
Cash 11,000
28
=>
29
Illustration
A long-term note should be recorded at the present
value of the cash payments on the note:
30
Mortgages Payable LO2
A written promise to pay a stated sum of money at one or

more specified future dates.
Mortgage money is usually related to a specific asset,
typically real estate. (ex. )
A mortgage generally requires periodic (usually monthly)
payments of principal and interest.
31
Illustration
Assume that McGiven Automobile Company borrows
$100,000 on January 1 to purchase a new showroom
and signs a mortgage agreement pledging the
showroom as collateral on the loan.
Jan. 1 Cash 100,000

Mortgage Payable 100,000
32
Mortgage Amortization LO2
Illustration
If the mortgage is at 8% for 30 years, and the monthly
payment is $733.76, payable on January 31 with
subsequent payments due at the end of each month
733.76 =
Jan. 31 Mortgage Payable 67.09

Interest Expense 666.67
Cash 733.76
2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license 33
Part of each mortgage payment pays off interest due,

and part of the payment reduces the principal amount
due.
Mortgage amortization schedule:
Exhibit 10.3
34
Do This LO2
PE10-9 and 10-10
35
Do This LO2
36
The Nature of Bonds
Bonds LO3
A contract between the borrowing company (issuer) and

the lender (investor).
The borrower promises to pay a specified amount of
interest at the end of each period for which the bond is
outstanding. The principal is then paid back at maturity.
Usually have maturity dates exceeding 10 years.
Bonds LO3

face value
maturity value
contract rate/coupon rate, stated
rate

38
Types of Bonds LO3
The Extent to Which Bondholders are Protected

Debentures
Secured bonds

39
Types of Bonds LO3
How the Bond Interest is Paid

Registered bonds

Coupon bonds
(bearer bonds)

40
Types of Bonds LO3
How the Bonds Mature

Term bonds

Serial bonds

Callable bonds

Convertible bonds

41
Types of Bonds LO3
Others
Zero coupon bonds

deep-discount bonds
Junk bonds

42
Characteristics of Bonds LO3
Bond Indenture
A contract between a bond issuer and a bond purchaser
that specifies the terms of a bond.
Principal (Face Value or Maturity Value )
The amount that will be repaid at the maturity date.
Usually issued in $1,000 increments.
Maturity Date
The date at which a bond principal or face amount
becomes payable.
43
Issuer of
Bonds
2013
Maturity
Date
DUE 2013 DUE 2013
Contractual
Interest
Rate
Face or
Par
2015 Cengage Learning. All Rights Reserved. May Value
not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
44
Price of Bonds
Bondholders can sell their bonds, at any time, at the
current market price on national securities exchanges.
The price of bonds is quoted as a percentage of face
value.
A $1,000 bond quoted at 98 is selling for $980 (98%
$1,000).
A $1,000 bond quoted at 103 is selling for $1,030 (103%
$1,000).
45
Determining a Bonds Issuance Price LO3
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?
Assume that Coronet, Inc. issues a zero-interest bond

with a face value of $1,000,000 due in 20 years. How
many would you pay for this bond?
the market value of the bond
46
Two Types of Payments When a Company Issuing

Bonds
Payment of interest
A single paymentthe principal
47
Illustration
Assume that Denver Company issues 10%, five-year
bonds with a total face value of $800,000. Interest is to
be paid semiannually.
$800,000 10%
48
about interest rate:

1. contractual interest rate ()
the rate applied to the face value to arrive at the interest paid in
a year ()
2. investors required rate of return

The rate investors demand for loaning funds to the corporation
=discounting rate =market rate=effective rate
=>
the type of bond issued, the state of the economy, current
industry conditions, and the companys performance=>

Issuance Price
Present Present value

+ Using the
value of the of the bonds
market rate of
interest face value at
interest
payments maturity
50
Bonds Issued at Face Value

When effective rate = stated rate.
Bonds Issued at a Discount
When effective rate > the stated rate.
Bonds Issued at a Premium
When effective rate < stated rate.
51
Four Steps to Computing Bond Values
Determine the market interest rate.
Compute the present value of the maturity amount.
Compute the present value of the annuity of

annual interest payments.
Add the quantities computed in (2)

and (3).
52
Bonds Issued at Face Value

Denver has agreed to issue $800,000, five-year bonds
and pay 10% interest, compounded semiannually.
Assume that the effective interest rate demanded by
investors for bonds of this level of risk is also 10%.
n=10,
i=5%
53
Bonds Issued at a Discount

Assume that the effective rate is 12% compounded
semiannually; the stated rate remains 10%
compounded semiannually.
n=10,
i=6%
54
Bonds Issued at a Premium

Assume that the effective rate is 8% compounded
semiannually and that the stated rate is still 10%
compounded semiannually.
n=10,
i=4%
55
Issue at Face Value, Discount, or Premium?
Bond
Contractual
Interest Rate
of 10%
56
Do This LO3
PE 10-13
57
Accounting for Bonds Payable Issued at Face LO3
Value
Illustration
For most of this discussion, we will use the following
data:
58
Bonds Payable Issued at Face Value LO3
Illustration
The journal entry to record their issuance on January 1,
2014, is as follows:
Cash 100,000
Bonds Payable 100,000
The entry to record the first semiannual payment of

interest on July 1, 2014, is:
Bond Interest Expense 6,000
Cash 6,000
59
Illustration
The following adjusting entry on December 31, 2014, to
account for the interest expense between July 1 and
December 31, 2014:

Bond Interest Payable 6,000
60
Illustration
At the end of the accounting period (December 31,
2014), the financial statements will report the following:
61
Illustration
On January 1, 2015, when the semiannual interest is
paid:
Cash 6,000
The entry required for retirement on January 1, 2024.

Cash 100,000
62
Bonds Retirements before Maturity LO3
EX. when interest rates fall

A company uses the money obtained by issuing new
bonds at a lower interest rate to retire the older, higher-
interest bonds.
Illustration
Assume that the Central Trucking bonds are now selling
in the bond market at 109 and are callable at 110.
The company decides to take advantage of the lower
interest rate (8%) by issuing new bonds and using the
proceeds to pay off the outstanding bonds.
63
Bonds Retirements before Maturity LO3
Illustration
Given that the bonds were issued at their face value,
the penalty (the call premium) is $10,000.
The entry to record the retirement of the bonds at 110 is:

Loss on Bond Retirement 10,000
Cash ($100,000 1.10) 110,000
64
Do This LO3
PE 10-17
65
Bonds Issued at a Discount or at a Premium
Amortizing Bond Discounts or Premiums* LO5
Illustration P.429
Assume that the $100,000, 10-year, 12% bonds issued

by Central Trucking on January 1, 2014, sold for
$89,406 with the interest paid semiannually.
The market rate is 14%.
The entry to record the issuance of the bonds is:
Cash 89,406
Discount on Bonds Payable 10,594
Accounting for Bonds Issued at a Discount* LO5

(1) effective-interest method (IFRS requires)
(2) straight-line method (US GAAP allows when the
results do not differ materially)
67
Straight-Line Amortization
Company writes off the same amount of discount or
premium each period the bonds are held.
Number of
Bond Bond discount
interest =
Discount amortization
periods
Effective-Interest Amortization
Company takes the time value of money into
consideration.
68
Illustration-Straight-Line Method
For Central Trucking, the semiannual amortization
would be $530 ($10,594 discount/10 years 1/2.)
Bond amortization is recorded when interest payments
are made, so the entry on July 1, 2014, is:

Discount on Bonds Payable 530
Cash 6,000
69
The adjusting entry to record the bond interest expense
on December 31, 2014, is:

70
The financial statements prepared at December 31,
2014, would report the following:
71
That retirement entry is:

Cash 100,000
72
Bond discount amortization schedule

Interest Discount
Cash paid Discount Carrying
Period exp. to be on B/P
for interest amort. amount
recorded (balance)
Issuance
$10,594 $89,406
date
1 $6,000 $6,530 $530 10,064 89,936
2 6,000 6,530 530 9,534 90,466
3 6,000 6,530 530 9,004 90,996

19 6,000 6,530 530 524 99,476
20 6,000 6,524 524 0 100,000
Total 120,000 130,594 10,594
73
Illustration-Effective-Interest Method
Assuming that in the example of Central Trucking, the
effective interest rate is 14 % or 7% every six months.
7%
Total 120,000 130,594 10,594

74
The entry on July 1, 2016 (Year 3) is:

Cash 6,000
The effective-interest method is required by

generally accepted accounting principles (both IFRS
and U.S. GAAP).
75
Do This LO5
E10-14 (p.448)
76
Do This LO5
77
Accounting for Bonds Issued at a Premium* LO5
Illustration
Assume that Central Trucking was able to sell its
$100,000, 12%, 10-year bonds at 103.
The entry to record the issuance of these bonds on
January 1, 2014, is:
Cash 103,000
Premium on Bonds Payable 3,000
78
The entry to record the first semiannual interest
payment and the premium amortization of July 1, 2014,
is:
Premium on Bonds Payable 150
Cash 6,000
79
The adjusting entry to record the accrual of the interest
expense on December 31, 2014, is:

80
The financial statements prepared at December 31,
2014, would report the following:
81
Assume that the Central Trucking $100,000, 12%, 10-
year bonds were issued on January 1, 2014, for
$112,463. The bonds pay interest semiannually on
January 1 and July 1. The effective interest rate is 10 %
or 5% every six months.
82
The entry on July 1, 2016 (Year 3) is:

Cash 6,000
83
Do This LO5
E10-15 (p.448)
84
Do This LO5
85
Using Debt-Related Financial Ratios
Debt-Related Financial Ratios LO4
P.427

Two ratios that provide information about debt-paying
ability and long-run solvency are:
1. Debt ratio / Debt-to-Equity ratio
2. Times interest earned ratio (interest coverage)

Debt Ratio
Represents the amount of assets financed through
debt.()
Total liabilities
Debt ratio =
Total assets
Disney for 2013 (the numbers are in millions):
$33,091
Debt ratio = = 40.7%
$81,241
The higher the percentage, the greater the risk that the company
may be unable to meet its maturing obligations.
Debt-to-Equity Ratio
The number of dollars of debt for every dollar invested
by stockholders.
Total Liabilities
Debt-to-equity ratio =
Total Equity
Disney for 2013:

$33,091
Debt-to-equity ratio = = 0.69
$48,150
The higher the debt-to-equity ratio, the more debt the

2015 Cengage company has.
Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
Times Interest Earned Ratio

The ratio of the income that is available for interest
payments.

Income before interest and taxes (operating profit)
Times interest earned =
Annual interest expense
Disney: $9,167
Times interest earned = = 39.0 times
$235
89

Principles of Financial Accounting-Chinese

Transféré par

Informations du document

Titre original

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Principles of Financial Accounting-Chinese

Transféré par

Droits d'auteur :

Formats disponibles

CHAPTER

Financing: Long-Term Liabilities

LO2 Accounting for Long-Term Liabilities

LO3 The Nature of Bonds

LO4 Using Debt-Related Financial Ratios

LO5 Bonds Issued at a Discount or at a Premium

Current liability is debt with two key features:

Current liabilities include notes payable, accounts payable, unearned

Obligations that are expected to be paid after one year.

Present Value and Future Value Concepts LO1

Assume that Coronet, Inc. issues a zero-interest bond with a

the market value of the bond

Congratulations! You have a winning lottery ticket and the stat

1. receive $9,000,000 in three years.

2. receive $7,000,000 immediately.

3. receive $3,000,000 at the end of each year for three years.

Which of these options would you select?

Present Value Future Amount

Present Value Future Amount

Computing the Present Value of a Single Amount

Computing the Future Value of a Single Amount

What is the present value of $10,000 to be paid in four

Earn more interest than the

Formula for Interest Rate

Yearly interest rate Interest rate

Formula For Number of Interest Periods

Annuity is a series of equal amounts to be received or paid

100 100 100 FV=?

If the interest rate is 12% compounded annually, the

Present Value of an Annuity Table (Appendix D, Table )

Computing Periodic Payments

Computing Periodic Payments

$20,000 = Payment 44.9550

For the lottery ticket example, which of these options

1. receive $9,000,000 in three years.

2. receive $7,000,000 immediately.

3. receive $3,000,000 at the end of each year for three

So you need to know the PV.

Compute the following values:

2. The future value in five years of $2,000 invested today at

3. The present value of 10 equal annual payments of $500

4. The payment associated with a loan of $20,000 to be

Accounting for Long-Term Liabilities LO2

Business Issues Involved with Long-Term Liabilities

Dec. 31, Interest Expense 1,000

Dec. 31, Interest Expense 1,000

Dec. 31, Interest Expense 1,000

A written promise to pay a stated sum of money at one or

Jan. 1 Cash 100,000

Jan. 31 Mortgage Payable 67.09

Part of each mortgage payment pays off interest due,

PE10-9 and 10-10

A contract between the borrowing company (issuer) and

The Extent to Which Bondholders are Protected

How the Bond Interest is Paid

How the Bonds Mature

DUE 2013 DUE 2013

Assume that you are willing to invest a sum of money

Assume that Coronet, Inc. issues a zero-interest bond

the market value of the bond

Two Types of Payments When a Company Issuing

about interest rate:

2. investors required rate of return