Академический Документы
Профессиональный Документы
Культура Документы
Accounting
14-1
Prepared by
Coby Harmon
University of California, Santa Barbara
14 Long-Term Liabilities
Intermediate Accounting
14th Edition
Learning
Learning Objectives
Objectives
1.
2.
3.
4.
5.
6.
7.
8.
9.
14-3
Long-Term
Long-Term Liabilities
Liabilities
Bonds Payable
Issuing bonds
Reporting and
Analyzing Long-Term
Debt
Off-balance-sheet
financing
Valuation
Effective-interest
method
Special situations
Costs of issuing
Extinguishment
14-4
Long-Term
Notes Payable
Bonds
Bonds Payable
Payable
Long-term debt consist of probable future sacrifices of
economic benefits arising from present obligations that are
not payable within a year or the operating cycle of the
company, whichever is longer.
Examples:
Bonds payable
Pension liabilities
Lease liabilities
Mortgages payable
Long-term debt has various
covenants or restrictions.
14-5
Issuing
Issuing Bonds
Bonds
Used when the amount of capital needed is too large for one
lender to supply.
14-6
Types
Types and
and Ratings
Ratings of
of Bonds
Bonds
Common types found in practice:
14-7
Types
Types and
and Ratings
Ratings of
of Bonds
Bonds
Corporate bond listing.
Company
Name
Price as a % of par
Interest rate based on price
14-8
Valuation
Valuation of
of Bonds
Bonds Payable
Payable
Issuance and marketing of bonds to the public:
14-9
Valuation
Valuation of
of Bonds
Bonds Payable
Payable
Selling price of a bond issue is set by the
relative risk,
Valuation
Valuation of
of Bonds
Bonds Payable
Payable
Interest Rate
14-11
Valuation
Valuation of
of Bonds
Bonds Payable
Payable
How do you calculate the amount of interest that is actually paid
to the bondholder each period?
14-12
Valuation
Valuation of
of Bonds
Bonds Payable
Payable
Assume Stated Rate of 8%
14-13
Market Interest
Bonds Sold At
6%
Premium
8%
Par Value
10%
Discount
LO 3
Valuation
Valuation of
of Bonds
Bonds Payable
Payable
Illustration: ServiceMaster Company issues $100,000 in
bonds, due in five years with 9 percent interest payable
annually on January 1. At the time of issue, the market rate for
such bonds is 11 percent.
Illustration 14-1
14-14
Valuation
Valuation of
of Bonds
Bonds Payable
Payable
Illustration 14-1
Illustration 14-2
14-15
Bonds
Bonds Issued
Issued at
at Par
Par on
on Interest
Interest Date
Date
Illustration: Buchanan Company issues at par 10-year term
bonds with a par value of $800,000, dated January 1, 2012,
and bearing interest at an annual rate of 10 percent payable
semiannually on January 1 and July 1, it records the following
entry.
Journal entry on date of issue, Jan. 1, 2012.
Cash
100,000
Bonds payable
14-16
100,000
Bonds
Bonds Issued
Issued at
at Par
Par on
on Interest
Interest Date
Date
Journal entry to record first semiannual interest payment on
July 1, 2012.
Interest expense
40,000
Cash
40,000
($800,000 x .10 x )
14-17
40,000
40,000
Bonds
Bonds Issued
Issued at
at aa Discount
Discount on
on Interest
Interest Date
Date
Illustration: Now assume Buchanan Company issues at 97,
10-year term bonds with a par value of $800,000, dated
January 1, 2012, and bearing interest at an annual rate of 10
percent payable semiannually on January 1 and July 1, it
records the issuance as follows.
Cash ($800,000 x .97)
Discount on bonds payable
Bonds payable
14-18
776,000
24,000
800,000
Bonds
Bonds Issued
Issued at
at aa Discount
Discount on
on Interest
Interest Date
Date
Illustration: Buchanan records the first semiannual interest
payment and the bond discount on July 1, 2012 as follows.
Buchanan amortizes the bond discount using the straight-line
method.
Interest expense
41,200
1,200
Cash
40,000
Interest payable
41,200
1,200
40,000
LO 3
Bonds
Bonds Issued
Issued at
at aa Premium
Premium on
on Interest
Interest Date
Date
Illustration: Now assume Buchanan Company issues at 103,
10-year term bonds with a par value of $800,000, dated
January 1, 2012, and bearing interest at an annual rate of 10
percent payable semiannually on January 1 and July 1, it
records the issuance as follows.
Cash ($800,000 x .103)
Premium on bonds payable
Bonds payable
14-20
824,000
24,000
800,000
Bonds
Bonds Issued
Issued at
at aa Premium
Premium on
on Interest
Interest Date
Date
Illustration: Buchanan records the first semiannual interest
payment and the bond discount on July 1, 2012 as follows.
Buchanan amortizes the bond premium using the straight-line
method.
Interest expense
Premium on bonds payable
38,800
1,200
Cash
40,000
Interest payable
38,800
1,200
40,000
LO 3
Valuation
Valuation of
of Bonds
Bonds
Bonds Issued between Interest Dates
Bond investors will pay the seller the interest accrued
from the last interest payment date to the date of issue.
On the next semiannual interest payment date, bond
investors will receive the full six months interest payment.
14-22
Bonds
Bonds Issued
Issued between
between Interest
Interest Dates
Dates
Illustration: on March 1, 2012, Taft Corporation issues 10year bonds, dated January 1, 2012, with a par value of
$800,000. These bonds have an annual interest rate of 6
percent, payable semiannually on January 1 and July 1. Taft
records the bond issuance at par plus accrued interest as
follows.
Cash
808,000
Bonds payable
Interest expense
14-23
800,000
($800,000 x .06 x 2/12)
8,000
Bonds
Bonds Issued
Issued between
between Interest
Interest Dates
Dates
On July 1, 2012, four months after the date of purchase, Taft
pays the purchaser six months interest, by making the following
entry.
Interest expense
Cash
14-24
24,000
24,000
Bonds
Bonds Issued
Issued between
between Interest
Interest Dates
Dates
If, however, Taft issued the 6 percent bonds at 102, its March 1
entry would be:
Cash
824,000
Bonds Payable
Premium on Bonds Payable ($800,000 x .02)
Interest Expense
800,000
16,000
8,000
14-25
Effective-Interest
Effective-Interest Method
Method
Effective-interest method produces a periodic interest
expense equal to a constant percentage of the carrying value
of the bonds.
Illustration 14-3
14-26
Effective-Interest
Effective-Interest Method
Method
Bonds Issued at a Discount
Illustration: Evermaster Corporation issued $100,000 of 8% term
bonds on January 1, 2012, due on January 1, 2017, with interest
payable each July 1 and January 1. Investors require an effectiveinterest rate of 10%. Calculate the bond proceeds.
Illustration 14-4
14-27
Effective-Interest
Effective-Interest Method
Method
Illustration 14-5
14-28
LO 4
Effective-Interest
Effective-Interest Method
Method
Illustration 14-5
92,278
14-29
7,722
100,000
Effective-Interest
Effective-Interest Method
Method
Illustration 14-5
4,614
614
4,000
LO 4
Effective-Interest
Effective-Interest Method
Method
Illustration 14-5
4,645
4,000
645
LO 4
Effective-Interest
Effective-Interest Method
Method
Bonds Issued at a Premium
Illustration: Evermaster Corporation issued $100,000 of 8% term
bonds on January 1, 2012, due on January 1, 2017, with interest
payable each July 1 and January 1. Investors require an effectiveinterest rate of 6%. Calculate the bond proceeds.
Illustration 14-6
14-32
Effective-Interest
Effective-Interest Method
Method
Illustration 14-7
14-33
LO 4
Effective-Interest
Effective-Interest Method
Method
Illustration 14-7
108,530
14-34
8,530
100,000
Effective-Interest
Effective-Interest Method
Method
Illustration 14-7
3,256
744
4,000
LO 4
Effective-Interest
Effective-Interest Method
Method
Accrued Interest
What happens if Evermaster prepares financial statements at the
end of February 2012? In this case, the company prorates the
premium by the appropriate number of months to arrive at the
proper interest expense, as follows.
Illustration 14-8
14-36
Effective-Interest
Effective-Interest Method
Method
Accrued Interest
Illustration 14-8
1,085.33
248.00
1,333.33
Effective-Interest
Effective-Interest Method
Method
Classification of Discount and Premium
Companies report bond discounts and bond premiums as a
direct deduction from or addition to the face amount of the
bond.
14-38
Effective-Interest
Effective-Interest Method
Method
Cost of Issuing Bonds
Unamortized bond issue costs are treated as a deferred
charge and amortized over the life of the debt.
Illustration: Microchip Corporation sold $20,000,000 of 10year debenture bonds for $20,795,000 on January 1, 2012
(also the date of the bonds). Costs of issuing the bonds were
$245,000. Microchip records the issuance of the bonds and
amortization of the bond issue costs as follows.
14-39
Effective-Interest
Effective-Interest Method
Method
Illustration: Microchip Corporation sold $20,000,000 of 10-year
debenture bonds for $20,795,000 on January 1, 2012 (also the
date of the bonds). Costs of issuing the bonds were $245,000.
Jan. 1,
2012
Cash
20,550,000
245,000
795,000
Bonds payable
Dec. 1,
2012
14-40
20,000,000
24,500
24,500
Extinguishment
Extinguishment of
of Debt
Debt
Illustration: On January 1, 2005, General Bell Corp. issued at 97
bonds with a par value of $800,000, due in 20 years. It incurred bond
issue costs totaling $16,000. Eight years after the issue date, General
Bell calls the entire issue at 101 and cancels it. General Bell computes
the loss on redemption (extinguishment).
Illustration 14-10
14-41
Extinguishment
Extinguishment of
of Debt
Debt
General Bell records the reacquisition and cancellation of the bonds
as follows:
Bonds payable
800,000
14-42
32,000
14,400
9,600
808,000
Long-Term
Long-Term Notes
Notes Payable
Payable
Accounting is Similar to Bonds
14-43
Notes
Notes Issued
Issued at
at Face
Face Value
Value
BE14-12: Coldwell, Inc. issued a $100,000, 4-year, 10% note at
face value to Flint Hills Bank on January 1, 2013, and received
$100,000 cash. The note requires annual interest payments each
December 31. Prepare Coldwells journal entries to record (a) the
issuance of the note and (b) the December 31 interest payment.
(a) Cash
Notes payable
(b) Interest expense
Cash
100,000
100,000
10,000
10,000
14-44
Notes
Notes Not
Not Issued
Issued at
at Face
Face Value
Value
Zero-Interest-Bearing Notes
Issuing company records the difference between the face
amount and the present value (cash received) as
14-45
a discount and
Zero-Interest-Bearing
Zero-Interest-Bearing Notes
Notes
BE14-13: Samson Corporation issued a 4-year, $75,000, zerointerest-bearing note to Brown Company on January 1, 2013, and
received cash of $47,663. The implicit interest rate is 12%. Prepare
Samsons journal entries for (a) the Jan. 1 issuance and (b) the
Dec. 31 recognition of interest.
14-46
LO 6
Zero-Interest-Bearing
Zero-Interest-Bearing Notes
Notes
BE14-13: Samson Corporation issued a 4-year, $75,000, zerointerest-bearing note to Brown Company on January 1, 2013, and
received cash of $47,663. The implicit interest rate is 12%. Prepare
Samsons journal entries for (a) the Jan. 1 issuance and (b) the
Dec. 31 recognition of interest.
(a)
Cash
47,664
27,336
Notes Payable
(b)
Interest expense
Discount on Notes Payable
14-47
75,000
5,720
5,720
Interest-Bearing
Interest-Bearing Notes
Notes
BE14-14: McCormick Corporation issued a 4-year, $40,000, 5%
note to Greenbush Company on Jan. 1, 2013, and received a
computer that normally sells for $31,495. The note requires annual
interest payments each Dec. 31. The market rate of interest is 12%.
Prepare McCormicks journal entries for (a) the Jan. 1 issuance and
(b) the Dec. 31 interest.
14-48
LO 6
Interest-Bearing
Interest-Bearing Notes
Notes
(a) Computer
Discount on notes payable
31,495
8,505
Notes payable
(b) Interest expense
14-49
40,000
3,779
Cash
2,000
1,779
Special
Special Notes
Notes Payable
Payable Situations
Situations
Notes Issued for Property, Goods, or Services
When exchanging the debt instrument for property, goods, or
services in a bargained transaction, the stated interest rate is
presumed to be fair unless:
(1) No interest rate is stated, or
(2) The stated interest rate is unreasonable, or
(3) The face amount is materially different from the current cash
price for the same or similar items or from the current fair value
of the debt instrument.
14-50
Special
Special Notes
Notes Payable
Payable Situations
Situations
Choice of Interest Rates
If a company cannot determine the fair value of the property,
goods, services, or other rights, and if the note has no ready
market, the company must approximate an applicable interest
rate.
Choice of rate is affected by:
14-51
Special
Special Notes
Notes Payable
Payable Situations
Situations
Illustration: On December 31, 2012, Wunderlich Company issued a
promissory note to Brown Interiors Company for architectural
services. The note has a face value of $550,000, a due date of
December 31, 2017, and bears a stated interest rate of 2 percent,
payable at the end of each year. Wunderlich cannot readily determine
the fair value of the architectural services, nor is the note readily
marketable. On the basis of Wunderlichs credit rating, the absence of
collateral, the prime interest rate at that date, and the prevailing
interest on Wunderlichs other outstanding debt, the company imputes
an 8 percent interest rate as appropriate in this circumstance.
14-52
Special
Special Notes
Notes Payable
Payable Situations
Situations
Illustration 14-15
Illustration 14-16
14-53
Special
Special Notes
Notes Payable
Payable Situations
Situations
Wunderlich records issuance of the note on Dec. 31, 2012, in
payment for the architectural services as follows.
Building (or Construction in Process)
418,239
131,761
Notes Payable
14-54
550,000
Special
Special Notes
Notes Payable
Payable Situations
Situations
Illustration 14-20
14-55
33,459
22,459
Cash
11,000
LO 6 Explain the accounting for long-term notes payable.
Mortgage
Mortgage Notes
Notes Payable
Payable
A promissory note secured by a document called a mortgage
that pledges title to property as security for the loan.
14-56
Fixed-rate mortgage.
Variable-rate mortgages.
Fair
Fair Value
Value Option
Option
Companies have the option to record fair value in their
accounts for most financial assets and liabilities, including
bonds and notes payable.
The FASB believes that fair value measurement for financial
instruments, including financial liabilities, provides more
relevant and understandable information than amortized cost.
14-57
Fair
Fair Value
Value Option
Option
Fair Value Measurement
Non-current liabilities are recorded at fair value, with unrealized
holding gains or losses reported as part of net income.
Illustrations: Edmonds Company has issued $500,000 of 6 percent
bonds at face value on May 1, 2012. Edmonds chooses the fair
value option for these bonds. At December 31, 2012, the value of
the bonds is now $480,000 because interest rates in the market
have increased to 8 percent.
Bonds Payable
20,000
20,000
Off-Balance-Sheet
Off-Balance-Sheet Financing
Financing
Off-balance-sheet financing is an attempt to borrow
monies in such a way to prevent recording the
obligations.
Different Forms:
14-59
Non-Consolidated Subsidiary
Operating Leases
Presentation
Presentation and
and Analysis
Analysis
Presentation of Long-Term Debt
Note disclosures generally indicate the nature of the liabilities,
maturity dates, interest rates, call provisions, conversion
privileges, restrictions imposed by the creditors, and assets
designated or pledged as security.
Fair value of the debt should be discloses.
Must disclose future payments for sinking fund requirements
and maturity amounts of long-term debt during each of the
next five years.
14-60
Presentation
Presentation and
and Analysis
Analysis
Analysis of Long-Term Debt
Two ratios that provide information about debt-paying ability
and long-run solvency are:
1.
Debt to total
assets
Total debt
=
Total assets
14-61
Presentation
Presentation and
and Analysis
Analysis
Analysis of Long-Term Debt
Two ratios that provide information about debt-paying ability
and long-run solvency are:
2.
Times
interest
earned
Interest expense
14-62
Presentation
Presentation and
and Analysis
Analysis
Illustration: Best Buy has total liabilities of $11,338 million,
total assets of $18,302 million, interest expense of $94 million,
income taxes of $802 million, and net income of $1,317 million.
We compute Best Buys debt to total assets and times interest
earned ratios
Illustration 14-21
14-63
APPENDIX
14A
TROUBLED-DEBT RESTRUCTURINGS
Illustration 14A-1
14-64
APPENDIX
14A
TROUBLED-DEBT RESTRUCTURINGS
Settlement of Debt
Can involve either a
14-65
APPENDIX
14A
TROUBLED-DEBT RESTRUCTURINGS
16,000,000
14-66
4,000,000
20,000,000
APPENDIX
14A
TROUBLED-DEBT RESTRUCTURINGS
5,000,000
21,000,000
14-67
20,000,000
4,000,000
APPENDIX
14A
TROUBLED-DEBT RESTRUCTURINGS
16,000,000
14-68
4,000,000
20,000,000
APPENDIX
14A
TROUBLED-DEBT RESTRUCTURINGS
3,200,000
14-69
20,000,000
12,800,000
4,000,000
APPENDIX
14A
TROUBLED-DEBT RESTRUCTURINGS
Modification of Terms
A debtors serious short-run cash flow problems will lead it to
request one or a combination of the following modifications:
1. Reduction of the stated interest rate.
2. Extension of the maturity date of the face amount of the debt.
3. Reduction of the face amount of the debt.
4. Reduction or deferral of any accrued interest.
14-70
APPENDIX
14A
TROUBLED-DEBT RESTRUCTURINGS
14-71
APPENDIX
14A
TROUBLED-DEBT RESTRUCTURINGS
Dec. 31,
2012
Notes Payable
356,056
Interest Expense
363,944
Cash
14-72
720,000
LO 10 Describe the accounting for a debt restructuring.
APPENDIX
14A
TROUBLED-DEBT RESTRUCTURINGS
Dec. 31,
2015
14-73
Notes Payable
Cash
9,000,000
9,000,000
APPENDIX
14A
TROUBLED-DEBT RESTRUCTURINGS
Creditor Calculations
Morgan National Bank (creditor)
Illustration 14A-3
2,593,428
2,593,428
APPENDIX
14A
TROUBLED-DEBT RESTRUCTURINGS
Creditor Calculations
In subsequent periods, Morgan National Bank reports interest
revenue based on the historical effective rate.
Illustration 14A-4
720,000
228,789
Interest Revenue
14-75
948,789
APPENDIX
14A
TROUBLED-DEBT RESTRUCTURINGS
Creditor Calculations
The creditor makes a similar entry (except for different
amounts debited to Allowance for Doubtful Accounts and
credited to Interest Revenue) each year until maturity. At
maturity, the company makes the following entry.
Dec. 10, 2015
Cash
9,000,000
1,500,000
Notes receivable
14-76
10,500,000
APPENDIX
14A
TROUBLED-DEBT RESTRUCTURINGS
14-77
APPENDIX
14A
TROUBLED-DEBT RESTRUCTURINGS
Illustration 14A-6
14-78
LO 10
APPENDIX
14A
TROUBLED-DEBT RESTRUCTURINGS
14-79
APPENDIX
14A
TROUBLED-DEBT RESTRUCTURINGS
14-80
RELEVANT FACTS
14-81
97,000
97,000
RELEVANT FACTS
14-82
14-83
14-84
a.
b.
c.
d.
Under GAAP, bonds payable is recorded at the face amount and any
premium or discount is recorded in a separate account. Under IFRS,
bonds payable is recorded at the carrying value so no separate
premium or discount accounts are used.
Copyright
Copyright
Copyright 2012 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.
14-85