Chapter 15 1

Chapter
15-1
Chapter 15
Long-Term Liabilities
Chapter
15-2 Accounting Principles, Ninth Edition
Study Objectives
1. Explain why bonds are issued.

2. Prepare the entries for the issuance of bonds and
interest expense.
3. Describe the entries when bonds are redeemed or
converted.
4. Describe the accounting for long-term notes payable.
5. Contrast the accounting for operating and capital leases.
6. Identify the methods for the presentation and analysis
of long-term liabilities.
Chapter
15-3
Long-Term Liabilities
Other Long- Statement

Bond
Bonds Basics Bond Issues Term Presentation
Retirements
Liabilities and Analysis
Types of Issuing bonds Redeeming Long-term Presentation

bonds at face value bonds at notes payable Analysis
Issuing Discount or maturity Lease
procedures premium Redeeming liabilities
Trading Issuing bonds bonds before
at a discount maturity
Market value
Issuing bonds Converting
at a premium bonds into
common
stock
Chapter
15-4
Bond Basics
Bonds are a form of interest-bearing notes

payable.
Three advantages over common stock:

1. Stockholder control is not affected.
2. Tax savings result.
3. Earnings per share may be higher.
Chapter
15-5 SO 1 Explain why bonds are issued.
Bond Basics
Effects on earnings per share—stocks vs. bonds.

Illustration 15-2
Chapter
Bond Basics
Question
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.
Chapter
Bond Basics
Types of Bonds
Secured and Unsecured (debenture) bonds.
Term and Serial bonds.
Registered and Bearer (or coupon) bonds.
Convertible and Callable bonds.
Chapter
Bond Basics
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.
Chapter
Bond Basics
Issuer of
Bonds Illustration 15-3
Maturity
Date
Contractual
Interest
Rate
Face or
Chapter
15-10 Par Value SO 1 Explain why bonds are issued.
Bond Basics
Bond Trading
Bonds traded on national securities exchanges.
Newspapers and the financial press publish bond prices
and trading activity daily.
Read as: Outstanding 5.125%, $1,000 bonds that mature in

2011. Currently yield a 5.747% return. On this day,
$33,965,000 of these bonds were traded. Closing price was
96.595% of face value, or $965.95.
Chapter
Bond Basics
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.
The features of a bond (callable, convertible, and so

on) affect the market rate of the bond.
Chapter
Accounting for Bond Issues
Assume Contractual Rate of 8%

Market Interest Bonds Sold At
6% Premium
8% Face Value
10% Discount
Chapter
15-13 SO 2 Prepare the entries for the issuance of bonds and interest expense.
Question
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.
Chapter
Question
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.
Chapter
Issuing Bonds at Face Value
Illustration: On January 1, 2010, San Marcos HS

issues $100,000, three-year, 8% bonds at 100 (100% of
face value). Interest is paid annually each Dec. 31.
Jan. 1 Cash 100,000

Bonds payable 100,000
Dec. 31 Interest expense 8,000

Cash 8,000
Chapter
Issuing Bonds at a Discount

issues $100,000, three-year, 8% bonds for $95,027
(95.027% of face value).
Jan. 1 Cash 95,027

Discount on bonds payable 4,973
Chapter
Statement Presentation
San Marcos HS
Balance Sheet (partial)
Long-term liabilities
Bonds payable $ 100,000
Less: Discount on bonds payable 4,973
$ 95,027
Chapter
Question
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.
Chapter
Issuing Bonds at a Premium

issues $100,000, three-year, 8% bonds for $105,346
(105.346% of face value).
Jan. 1 Cash 105,346

Premium on bonds payable 5,346
Chapter
Statement Presentation
San Marcos HS
Balance Sheet (partial)
Long-term liabilities
Bonds payable $ 100,000
Add: Premium on bonds payable 5,346
$ 105,346
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.
Chapter
Accounting for Bond Retirements
Redeeming Bonds at Maturity

San Marcos HS records the redemption of its bonds at
maturity as follows:

Cash 100,000
Chapter
15-22 SO 3 Describe the entries when bonds are redeemed or converted.
Redeeming Bonds before Maturity

When a company retires bonds before maturity, it is
necessary to:
1. eliminate the carrying value of the bonds at the
redemption date;
2. record the cash paid; and
3. recognize the gain or loss on redemption.
The carrying value of the bonds is the face value of the bonds
less unamortized bond discount or plus unamortized bond premium
at the redemption date.
Chapter
Question
When bonds are redeemed before maturity, the gain
or loss on redemption is the difference between the
cash paid and the:
a. carrying value of the bonds.
b. face value of the bonds.
c. original selling price of the bonds.
d. maturity value of the bonds.
Chapter
Illustration: The San Marcos HS, 8% bonds of

$100,000 issued on Jan. 1, 2010, are recalled at 105 on
Dec. 31, 2011. Assume that the carrying value of the
bonds at the redemption date is $98,183.
Journal entry at Dec. 31, 2011:

Loss on bond redemption 6,817
Cash ($100,000 x 105%) 105,000
Discount on bonds payable 1,817
Chapter
Converting Bonds into Common Stock

Until conversion, the bondholder receives interest on the
bond.
For the issuer, the bonds sell at a higher price and pay a
lower rate of interest than comparable debt securities
without the conversion option.
Upon conversion, the company transfers the carrying value

of the bonds to paid-in capital accounts. No gain or loss is
recognized.
Chapter
E15-6 Nocioni Company issued $1,000,000 of bonds on

January 1, 2010.
Instructions: Prepare the journal entry to record the
conversion of the bonds into 30,000 shares of $10 par value
common stock. Assume the bonds were issued at par.
Bonds payable 1,000,000

Common stock (30,000 x $10) 300,000
Paid-in capital in excess of par 700,000
Chapter
Question
When bonds are converted into common stock:
a. a gain or loss is recognized.
b. the carrying value of the bonds is transferred
to paid-in capital accounts.
c. the market price of the stock is considered in
the entry.
d. the market price of the bonds is transferred to
paid-in capital.
Chapter
Accounting for Other Long-Term Liabilities
Long-Term Notes Payable

May be secured by a mortgage that pledges title to
specific assets as security for a loan
Typically, the terms require the borrower to make
installment payments over the term of the loan. Each
payment consists of
1. interest on the unpaid balance of the loan and
2. a reduction of loan principal.
Companies initially record mortgage notes payable at
face value.
Chapter
15-29 SO 4 Describe the accounting for long-term notes payable.
Exercise: Tucki Co. receives $240,000 when it issues a
$240,000, 10%, mortgage note payable to finance the
construction of a building at December 31, 2010. The terms
provide for semiannual installment payments of $16,000 on
June 30 and December 31. Prepare the journal entries to
record the mortgage loan and the first installment payment.
Dec. 31 Cash 240,000

Mortgage notes payable 240,000
Jun. 30 Interest expense 12,000 *

Mortgage notes payable 4,000
Cash 16,000
* ($240,000 x 10% x 6/12 = $12,000)
Chapter
Question
Each payment on a mortgage note payable consists
of:
a. interest on the original balance of the loan.
b. reduction of loan principal only.
c. interest on the original balance of the loan and
reduction of loan principal.
d. interest on the unpaid balance of the loan and
reduction of loan principal.
Chapter
Chapter
15-32
Lease Liabilities
A lease is a contractual arrangement between a lessor
(owner of the property) and a lessee (renter of the
property). Illustration 15-13
Chapter
15-33 SO 5 Contrast the accounting for operating and capital leases.
The issue of how to report leases is the case of substance versus
form. Although technically legal title may not pass, the benefits
from the use of the property do.
Operating Lease Capital Lease

Journal Entry: Journal Entry:
Rent expense xxx Leased equipment xxx
Cash xxx Lease liability xxx
A lease that transfers substantially all of the benefits and risks of

property ownership should be capitalized (only noncancellable leases
may be capitalized).
Statement of Financial Accounting Standard No. 13,

“Accounting for Leases,” 1976
Chapter
To capitalize a lease, one or more of four criteria

must be met:
1. Transfers ownership to the lessee.
2. Contains a bargain purchase option.
3. Lease term is equal to or greater than 75 percent of

the estimated economic life of the leased property.
4. The present value of the minimum lease payments
(excluding executory costs) equals or exceeds 90
percent of the fair value of the leased property.
Chapter
Exercise: On January 1, 2010, Burke Corporation signed a

5-year noncancelable lease for a machine. The machine has
an estimated useful life of 6 years and the present value of
the lease payments is $36,144, which is equal to the fair
market value of the equipment. There is no transfer of
ownership during the lease term, nor is there any bargain
purchase option.
Instructions:
(a) What type of lease is this? Explain.
(b) Prepare the journal entry to record the lease on January
1, 2010.
Chapter
Exercise: (a) What type of lease is this? Explain.

Capitalization Criteria: Capital Lease?
1. Transfer of ownership NO
2. Bargain purchase option NO
3. Lease term => 75% of Lease term 5 yrs.
economic life of leased Economic life 6 yrs.
property YES 83.3%
4. Present value of minimum
lease payments => 90% of YES - PV and FMV
are the same.
FMV of property
Chapter
Exercise: (b) Prepare the journal entry to record the

lease on January 1, 2010.
Jan. 1 Leased asset - equipment 36,144

Lease liability 36,144
The portion of the lease liability expected to be paid in the

next year is a current liability. The remainder is classified
as a long-term liability.
Chapter
Question
The lessee must record a lease as an asset if the
lease:
a. transfers ownership of the property to the
lessor.
b. contains any purchase option.
c. term is 75% or more of the useful life of the
leased property.
d. payments equal or exceed 90% of the fair
market value of the leased property.
Chapter
Statement Analysis and Presentation
Presentation Illustration 15-14
Chapter SO 6 Identify the methods for the presentation

15-40
and analysis of long-term liabilities.
Analysis of Long-Term Debt

Two ratios that provide information about debt-
paying ability and long-run solvency are:
1. Debt to Total debt

=
total assets
Total assets
The higher the percentage of debt to total assets,

the greater the risk that the company may be
unable to meet its maturing obligations.

15-41
Analysis of Long-Term Debt

Two ratios that provide information about debt-
paying ability and long-run solvency are:
Income before income taxes
2. Times and interest expense
interest =
earned Interest expense
Indicates the company’s ability to meet interest

payments as they come due.

15-42
Chapter
15-43
Present Value Concepts Related to Bond Pricing
Appendix 15A
Present Value of Face Value
To illustrate present value concepts, 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?
To compute the answer,
 divide the future amount by 1 plus the interest rate
($1,000/1.10 = $909.09 OR
 use a Present Value of 1 table. ($1,000 X .90909) =
$909.09 (10% per period, one period from now).
Chapter
15-44 SO 7 Compute the market price of a bond.

 divide the future amount by 1 plus the interest rate
($1,000/1.10 = $909.09.
Illustration 15A-1
Chapter

 use a Present Value of 1 table. ($1,000 X .90909) =
$909.09 (10% per period, one period from now).
Chapter
The future amount ($1,000), the interest rate (10%), and

the number of periods (1) are known
Illustration 15A-2
Chapter
If you are to receive the single future amount of $1,000

in two years, discounted at 10%, its present value is
$826.45 [($1,000 1.10) 1.10].
Illustration 15A-3
Chapter

To compute the answer using a Present Value of 1 table.
($1,000 X .82645) = $826.45 (10% per period, two
periods from now).
Chapter
Present Value of Interest Payments (Annuities)

In addition to receiving the face value of a bond at
maturity, an investor also receives periodic interest
payments (annuities) over the life of the bonds.
To compute the present value of an annuity, we need to
know:
1) interest rate,
2) number of interest periods, and
3) amount of the periodic receipts or payments.
Chapter

Assume that you will receive $1,000 cash annually for
three years and the interest rate is 10%.
Illustration 15A-5
Chapter

Illustration 15A-6
Chapter

$1,000 annual payment x 2.48685 = $2,486.85
Chapter
Computing the Present Value of a Bond

The selling price of a bond is equal to the sum of:
1) The present value of the face value of the bond
discounted at the investor’s required rate of return
PLUS
2) The present value of the periodic interest payments
discounted at the investor’s required rate of return
Chapter
Assume a bond issue of 10%, five-year bonds with a face

value of $100,000 with interest payable semiannually on
January 1 and July 1.
Illustration 15A-8
Chapter

Illustration 15A-9
Contractual Rate = Discount Rate Issued at Face Value

Chapter

Illustration 15A-10
Contractual Rate < Discount Rate Issued at a Discount

Chapter

Illustration 15A-11
Contractual Rate > Discount Rate Issued at a Premium

Chapter
Effective-Interest Method of Bond Amortization
Appendix 15B
Under the effective-interest method, the amortization

of bond discount or bond premium results in period
interest expense equal to a constant percentage of the
carrying value of the bonds.
Required steps:
1. Compute the bond interest expense.
2. Compute the bond interest paid or accrued.
3. Compute the amortization amount.
Chapter SO 8 Apply the effective-interest method of amortizing

15-59 bond discount and bond premium.
Amortizing Bond Discount

Assume Candlestick, Inc. issues $100,000 of 10%, five-year
bonds on January 1, 2010, for $92,639, with interest
payable each July 1 and January 1. This results in a discount
of $7,361.
Illustration 15B-2


payable each July 1 and January 1. This results in a discount
of $7,361.
Journal entry on July 1, 2010, to record the interest

payment and amortization of discount is as follows:
July 1 Interest Expense 5,558

Cash 5,000
Discount on Bonds Payable 558

Amortizing Bond Premium

payable each July 1 and January 1. This results in a premium
of $8,111.
Illustration 15B-4

Amortizing Bond Premium

payable each July 1 and January 1. This results in a premium
of $8,111.
payment and amortization of premium is as follows:

Premium on Bonds Payable 676
Cash 5,000

Straight-Line Amortization
Appendix 15C
Candlestick, Inc., sold $100,000, five-year, 10% bonds on
January 1, 2010, for $92,639 (discount of $7,361). Interest
is payable on July 1 and January 1. The bond discount
amortization for each interest period is $736 ($7,361/10).
Illustration 15C-2
Chapter SO 9 Apply the straight-line method of amortizing

Straight-Line Amortization

Candlestick, Inc., sold $100,000, five-year, 10% bonds on
January 1, 2010, for $92,639 (discount of $7,361). Interest
is payable on July 1 and January 1. The bond discount
amortization for each interest period is $736 ($7,361/10).

payment and amortization of discount is as follows:

Discount on Bonds Payable 736
Cash 5,000
Chapter SO 9 Apply the straight-line method of amortizing

Copyright
“Copyright © 2009 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted
in Section 117 of the 1976 United States Copyright Act without
the express written permission of the copyright owner is
unlawful. Request for further information should be addressed
to the Permissions Department, John Wiley & Sons, Inc. The
purchaser may make back-up copies for his/her own use only
and not for distribution or resale. The Publisher assumes no
responsibility for errors, omissions, or damages, caused by the
use of these programs or from the use of the information
contained herein.”
Chapter
15-66

Chapter 15 1

Transféré par

Informations du document

Description originale:

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

Chapter 15 1

Transféré par

Droits d'auteur :

Formats disponibles

Chapter

1. Explain why bonds are issued.

Other Long- Statement

Types of Issuing bonds Redeeming Long-term Presentation

Bonds are a form of interest-bearing notes

Three advantages over common stock:

Effects on earnings per share—stocks vs. bonds.

Read as: Outstanding 5.125%, $1,000 bonds that mature in

Determining the Market Value of Bonds

1. the dollar amounts to be received,

2. the length of time until the amounts are received, and

3. the market rate of interest.

The features of a bond (callable, convertible, and so

Assume Contractual Rate of 8%

Illustration: On January 1, 2010, San Marcos HS

Jan. 1 Cash 100,000

Dec. 31 Interest expense 8,000

Illustration: On January 1, 2010, San Marcos HS

Jan. 1 Cash 95,027

Illustration: On January 1, 2010, San Marcos HS

Jan. 1 Cash 105,346

Issuing bonds at an amount different from face value is

Redeeming Bonds at Maturity

Bonds payable 100,000

Redeeming Bonds before Maturity

Illustration: The San Marcos HS, 8% bonds of

Journal entry at Dec. 31, 2011:

Converting Bonds into Common Stock

Upon conversion, the company transfers the carrying value

E15-6 Nocioni Company issued $1,000,000 of bonds on

Bonds payable 1,000,000

Long-Term Notes Payable

Dec. 31 Cash 240,000

Jun. 30 Interest expense 12,000 *

Operating Lease Capital Lease

A lease that transfers substantially all of the benefits and risks of

Statement of Financial Accounting Standard No. 13,

To capitalize a lease, one or more of four criteria

3. Lease term is equal to or greater than 75 percent of

Exercise: On January 1, 2010, Burke Corporation signed a

Exercise: (a) What type of lease is this? Explain.

Exercise: (b) Prepare the journal entry to record the

Jan. 1 Leased asset - equipment 36,144

The portion of the lease liability expected to be paid in the

Presentation Illustration 15-14

Chapter SO 6 Identify the methods for the presentation

Analysis of Long-Term Debt

1. Debt to Total debt

The higher the percentage of debt to total assets,

Chapter SO 6 Identify the methods for the presentation

Analysis of Long-Term Debt

Indicates the company’s ability to meet interest

Chapter SO 6 Identify the methods for the presentation

Present Value of Face Value

Present Value of Face Value

Present Value of Face Value

The future amount ($1,000), the interest rate (10%), and

Present Value of Face Value

If you are to receive the single future amount of $1,000

Present Value of Face Value

Present Value of Interest Payments (Annuities)

Present Value of Interest Payments (Annuities)

Present Value of Interest Payments (Annuities)