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CHAPTER 15
LONG-TERM LIABILITIES
Accounting Principles, Eighth Edition
Chapter
15-1
Long-Term Liabilities
Accounting
for Bond
Issues
Accounting
for Bond
Retirements
Types of
bonds
Issuing bonds
at face value
Issuing
procedures
Discount or
premium
Redeeming
bonds at
maturity
Trading
Issuing bonds
at a discount
Bonds Basics
Market value
Issuing bonds
at a premium
Chapter
15-2
Redeeming
bonds before
maturity
Converting
bonds into
common
stock
Accounting
for Other
Long-Term
Liabilities
Long-term
notes payable
Lease
liabilities
Statement
Presentation
and Analysis
Presentation
Analysis
Bond Basics
Bonds are:
• interest-bearing notes payable
• issued by corporations, universities, and
governmental agencies
• like common stock, can be sold in small
denominations (usually a thousand dollars)
• attract many investors
Chapter
15-3
LO 1 Explain why bonds are issued.
Bond Basics
To obtain large amounts of long-term capital, management usually
must decide whether to issue bonds or to use equity financing
(common stock).
Three advantages over common stock:
1.
Stockholder control is not affected.
2.
Tax savings result.
3.
Earnings per share may be higher.
Two disadvantages over common stock:
1)Interest must be paid on a periodic basis
2)Principal (face value) must be repaid at maturity
Chapter
15-4
LO 1 Explain why bonds are issued.
Bond Basics
Effects on earnings per share—stocks vs. bonds.
Illustration 15-2
Chapter
15-5
LO 1 Explain why bonds are issued.
Types of Bonds: Secured and Unsecured


Chapter
15-6
Secured Bonds: also called debenture bonds
are issued against the general credit of the
barrower.
Unsecured Bonds: have specific assets of
the issuer pledged as collateral for the bonds
Ex. Mortgage
Types of Bonds: Term and Serial Bonds
3) Term bonds - bonds that mature at a single
specified future date
Registered
2005 2006 2007
2008
4) Serial bonds - bonds that mature in installments
2005
Registered
Chapter
15-7
2006
2007
2008
Types of Bonds
Convertible and Callable


Convertible
 convert the bonds into
common stock at holder’s
option
Callable
 subject to call and
retirement at a stated
dollar amount prior to
maturity at the option of
the issuer
Chapter
15-8
Bond Basics
Issuing Procedures
Bond contract is 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 has a $1,000 face value.
Interest payments are
usually made semiannually.
Chapter
15-9
Generally issued when the amount of capital needed is too large
for one lender to supply.
LO 1 Explain why bonds are issued.
Bond Basics
Issuer of
Bonds
Illustration 15-3
Maturity
Date
Contractual
Interest
Rate
Chapter
15-10
Face or
Par Value
LO 1 Explain why bonds are issued.
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,
3. the market rate of interest.
The features of a bond (callable, convertible, etc) affect the
market rate of the bond.
A corporation only makes journal entries when it issues or buys
back bonds, and when bondholders convert bonds into common
stock.
Transactions between a bondholder and other investors are not
journalized by the issuing corporation.
Chapter
15-11
LO 1 Explain why bonds are issued.
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
Dec. 31
Cash
Bonds payable
100,000
Interest expense
Cash
8,000
100,000
8,000
Companies classify bond interest payable as a current liability.
Chapter
15-12
LO 2 Prepare the entries for the issuance of bonds and interest expense.
The Real World
Issuing bonds at a $ amount different from face
value is quite common.
(Meaning… a $1,000 bond does not always sell for $1,000.)
http://www.old-stocks-bonds.com/gm-214384a.jpg
Why? 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
(face) rate are the same.
Chapter
15-13
Accounting for Bond Issues
Assume Contractual (Face) Rate of 8%
Chapter
15-14
Market Interest
$1,000 Face Value
Bonds Sold At…
6%
Premium
8%
Face Value
10%
Discount
LO 2 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at a Discount
Illustration: On January 1, 2010, San Marcos HS
issues $100,000, three-year, 8% bonds for $95,027
(95.027% of face value).
Jan. 1
Cash
Discount on bonds payable
Bonds payable
95,027
4,973
100,000
Although discount on bonds payable has a debt balance, it is not an
asset.
Chapter
15-15
LO 2 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at a Premium
Illustration: On January 1, 2010, San Marcos HS
issues $100,000, three-year, 8% bonds for $105,346
(105.346% of face value).
Jan. 1
Cash
105,346
Premium on bonds payable
Bonds payable
Chapter
15-16
5,346
100,000
LO 2 Prepare the entries for the issuance of bonds and interest expense.
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
15-17
LO 4 Describe the accounting for long-term notes payable.
Accounting for Other Long-Term Liabilities
Lease Liabilities - A lease is a contract between a lessor
(owner of the property) and a lessee (renter of the property).
Illustration 15-13
Chapter
15-18