Accounting Principles, 7 th Edition Weygandt • Kieso • Kimmel. Chapter 16. LONG-TERM LIABILITIES. CHAPTER 16 LONG-TERM LIABILITIES. After studying this chapter, you should be able to:. 1 Explain why bonds are issued. 2 Prepare the entries for the issuance of bonds and interest expense.
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Accounting Principles, 7th Edition
Weygandt • Kieso • Kimmel
After studying this chapter, you should be able to:
1Explain why bonds are issued.
2Prepare 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.
Long-term financing, bonds, offer the
following advantages over勝過 common
1)Stockholder control股東控制權 not affected
2)Tax savings 節稅效果
3)Earnings per share may be higher
1)Interest must be paid on a periodic basis
2)Principal (face value) must be repaid at maturity
Specific assets特定資產 of the issuer pledged as collateral抵押品 for the bonds( a mortgage bond抵押債券 is secured by real estate)
2) Unsecured bonds 無擔保債券
Issued against the general credit一般信用 of the borrower; they are also called debenture bonds信用債券.
RegisteredTypes of Bonds: Term and Serial Bonds
3) Term bonds定期還本債券
4) Serial bonds分期還本債券
2005 2006 2007 2008
2005 2006 2007 2008
RegisteredTypes of Bonds:Registered and Bearer
6)Bearer or coupon bonds不記名債券或
send in coupons to receive interest
Pay to: Joe Smith
Pay to: Bearer
The market value (present value)
of a bond is determined by:
1) the dollar amounts to be received
2) the length of time until the amounts are received
3) the market rate of interest市場利率, which is the rate investors demand for loaning funds.
The process of finding the present value（現值即為市價） is referred to as discounting the future amounts.將未來金額折現
Bonds may be issued at face value平價發行, below face value (at a discount)折價發行, or above face value (at a premium)溢價發行. They also are sometimes issued between interest dates. 在兩付息日間發行
Assume that Devor Corporation issues 1,000, 10-year, 9% $1,000 bonds dated January 1, 2005, at 100 (100% of face value). The entry to record the sale is:
Bonds payable are reported in the long-term liability section of the balance sheet because the maturity date is more than one year away.
Assume that interest is payable semiannually半年 on January 1 and July 1 on the bonds, interest of $45,000 ($1,000,000 x 9% x 6/12)must be paid on July 1, 2005. The entry for the payment is:
At December 31, an adjusting entry調整分錄is required to recognize the $45,000 of interest expense incurred since July 1. The entry is:
Bond interest payable is classified as a current liability, because it is scheduled for payment within the next year. When interest is paid on January 1, 2006, Bond Interest Payable is debited, and Cash is credited for $45,000 in order to eliminate the liability.
Market Rates Bonds Sell at:
Assume that on January 1, 2005, Candlestick, Inc. sells $100,000, 5-year, 10% bonds for 92,639 (92.639% of face value) with interest payable on July 1 and January 1. The entry to record the issuance is:
Although Discount on Bonds Payable has a debit balance, it is NOT an asset. Rather, it is a contra account, which is deducted from bonds payable on the balance sheet, as illustrated below:
The $92,639 represents the carrying (or book) value of the bonds. On the date of issue this amount equals the market price of the bonds.之後則兩者不一定相等，要看市場利率的變化
Total cost of borrowing $57,361
Alternatively, the total cost of borrowing can be computed as follows:
The issuance of bonds at a premium we now assume the Candlestick, Inc. bonds described above are sold for $108,111 (108.111% of face value) rather than for $ 92,639.
108,111 100,000 8,111
Add: Premium on bonds payable
Premium on bonds payable is added to
bonds payable on the balance sheet,
as shown below:
The sale of bonds above face value causes the total cost of borrowing to be less than the bond interest paid. The premium is considered to be a reduction in the cost of borrowing that should be credited to Bond Interest Expense over the life of the bonds.之後之折溢價攤銷會介紹
Total cost of borrowing $41,889
Alternatively, the total cost of borrowing
can be determined as follows:
Regardless of the issue price of bonds, the book value of the bonds at maturity will equal their face value.不管發行價格為何，債券到期日之BV等於面值，因為折價或溢價均會攤銷完
Assuming that the interest for the last interest period is paid and recorded separately, the entry to record the redemption of the Candlestick bonds at maturity is:
1)Eliminate the carrying value （包括未攤銷之折價或溢價）of the bonds at the redemption date
2)Record the cash paid
3)Recognize the gain or loss on redemption.
A gain (loss) is reported as an extraordinary item（金額重大且不常發生） in the income statement.
Assume that at the end of the eighth period, Candlestick, Inc. retires its bonds at 103 after paying the semiannual interest. The carrying value of the bonds at the redemption date is
$101,623. The entry to record the redemption at the end of the eighth interest period (January 1, 2009) is:
In recording the conversion of bonds into common stock the current market prices of the bonds and the stock are ignored.採用帳面價值法
Instead, the carrying value of the bonds is transferred to paid-in capital accounts. No gain or loss is recognized.避免企業操縱損益
Assume that on July 1 Saunders Associates converts $100,000 bonds sold at face value into 2,000 shares of $10 par value common stock. Both the bonds and the common stock have a market value of $130,000. The entry to record the conversion is:
100,000 20,000 80,000
To illustrate, assume that Porter Technology Inc. issues a $500,000, 12%, 20-year mortgage note on December 31, 2005, to obtain needed financing for the construction of a new research laboratory. The terms provide for semiannual installment payment of $33,231. The installment payment schedule for the first year is shown below:
Issue date $500,000
1 $33,231 $30,000 $3,231 496,769
2 $33,231 29,806 3,425 493,344
30,000 3,231 33,231
The entries to record the mortgage loan and first
installment payment (per schedule on previous slide)
are as follows:
Car rental is an example of an operating lease
a)Lease transfers ownership of the property to the lessee.
b)Lease contains a bargain purchase option優惠承購權
c) Lease term租賃期間 is equal to 75% or more of the economic life of the leased property.
d) Present value of the lease payments equals or exceeds 90% of the fair market value of the leased property.
Assume that Gonzalez Company decides to lease new equipment. The lease period is 4 years; the economic life of the leased equipment is estimated to be 5 years. The present value of the lease payments is $190,000, 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.
IN THIS EXAMPLE, GONZALEZ HAS ESSENTIALLY PURCHASED
THE EQUIPMENT BECAUSE CONDITIONS (3) AND (4) HAVE
BEEN MET (SEE PREVIOUS SLIDE).
The long-term liabilities for
LAX Corporation are shown below:
The debt to total assets ratiomeasures the percentage of total assets provided by creditors, indicating the degree of leverage utilized. It is calculated by dividing total debt by total assets.
44% = $17,859 ÷ $40,566
TOTAL DEBT DEBT TO TOTAL ASSETS = ———————— TOTAL ASSETS
The times interest earned ratioindicates the company’s ability to meet interest payments as they come due. It is computed by dividing income before income taxes and interest expense by interest expense.
59.1 times = ($6,597+ $2,694 + $160) ÷ $160
TIMES INTEREST INCOME BEFORE INCOME TAXES AND INTEREST EXPENSE EARNED = ————————————————————————————— INTEREST EXPENSE
Present Value – One Period Discount
Present Value – Two Period Discount
Present Value of issued at a premiumFace Value
Present Value of Interest Payments issued at a premium(Annuity年金)
Present Value of Interest Payments issued at a premium(Annuities)
Present Value of a issued at a premiumBond
0 1 2 3 4 5 issued at a premium
5 year periodTime diagram depicting cash flows
$9,000 $9,000 $9,000 $9,000 $9,000 Interest
Bond Interest Paid
of Bonds Rate
Bond Interest Expense
of Bonds Effective
at Beginning Interest
of Period Rate
Candlestick Inc. issues $100,000 of 10%, 5-year bonds on January 1, 2005 with interest payable each July 1 and January 1. The bonds will sell for $92,639 with an effective interest rate of 12%; Therefore, the bond discount is $7,361 ($100,000 - $92,639). The schedule below facilitates recording of interest expense and discount amortization.
NOTE: TABLE WILL CONTINUE FOR 10 SEMIANNUAL PERIODS
Issue date $7,361 $92,639
1 $5,000 $5,558 $ 558 6,803 93,197
2 $5,000 5,592 592 6,211 93,789
Candlestick Inc. issues $100,000 of 10%, 5-year bonds on January 1, 2005 with interest payable each July 1 and January 1. The bonds will sell for $108,111 with an effective interest rate of 8%; therefore, the bond premium is $8,111 ($108,111-$100,000). The schedule below facilitates recording of interest expense and premium amortization.
NOTE: TABLE WILL CONTINUE FOR 10 SEMIANNUAL PERIODS
Issue date $8,111 $108,111
1 $5,000 $4,324 $676 $7,435 107,435
2 5,000 4,297 703 6,732 106,732
In the previous example, the bond discount amortization is $736 ($7,361 /10 periods). The entry to record the payment of bond interest and the amortization of bond discount on the first interest date (July 1, 2005) is: 見Illustration 16c-2之折價攤銷表
5,736 736 5,000
At December 31, the adjusting entry is:
5,736 736 5,000
Over the term of the bonds, the balance in Discount on Bonds Payable will decrease by the same amount until it has a zero balance at maturity. Thus, the carrying value of the bonds at maturity will be equal to the face value.
The premium amortization for each interest period is $811 ($8,111 / 10). The entry to record the first payment of interest on July 1 is:見Illustration 16c-4之溢價攤銷表
At December 31, the adjusting entry is: issued at a premiumAmortizing Bond Premium
4,189 811 5,000
Over the term of the bonds, the balance in Premium on Bonds Payable will decrease by the same amount until it has a zero balance at maturity date of the bonds. Thus, the carrying value of the bonds at maturity will be equal to the face value.
To illustrate, assume that Deer Corporation sells $1,000,000, 9% bonds at face value plus accrued interest on March 1. Interest is payable semiannually on July 1 and January 1. The accrued interest is $15,000 ($1,000,000 x 9% x 2/12). The total proceeds on the sale of the bonds, therefore, are $1,015,000. The entry to record the sale is:Issuing Bonds between Interest Dates
When bonds are issued between interest payment dates, the issuer requires the investor to pay the market price for the bonds plus accrued interest since the last interest date.
1,015,000 1,000,000 15,000
At the first interest date, it is necessary to (1) eliminate the bond interest payable balance and (2) recognize interest expense for the 4 months (March 1 - June 30) the bonds have been outstanding. Interest expense is $30,000 ($1,000,000 x 9% x 4/12). The entry on July 1 for the $45,000 interest payment is: