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Long-Term Liabilities

Long-Term Liabilities. Chapter 9. Learning Objectives. Explain financing alternatives Identify the characteristics of bonds Determine the price of a bond issue Account for the issuance of bonds Record the retirement of bonds Identify other major long-term liabilities

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Long-Term Liabilities

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  1. Long-Term Liabilities Chapter 9

  2. Learning Objectives • Explain financing alternatives • Identify the characteristics of bonds • Determine the price of a bond issue • Account for the issuance of bonds • Record the retirement of bonds • Identify other major long-term liabilities • Make financial decisions using long-term liability ratios

  3. Part A Overview of Long-Term Debt

  4. 9-4 Learning Objective 1 Explain financing alternatives

  5. Financing Alternatives • Capital structure: mixture of liabilities and stockholders’ equity a business uses • Debt financing: borrowing money • Equity financing: obtaining additional investment from stockholders

  6. 9-6 Learning Objective 2 Identify the characteristics of bonds

  7. What Are Bonds? • Formal debt instrument • Usually issued to many lenders • Borrower repays the principal or face amount, at a specified maturity date • Pay interest over the life of the bond • Private placement: selling debt securities directly to a single investor

  8. Characteristics of Bonds • Secured bonds • Unsecured bonds • Term bonds • Serial bonds • Callable bonds • Convertible bonds

  9. 9-9 Illustration 9.1—Summary of BondCharacteristics

  10. Part B Pricing a Bond

  11. 9-11 Learning Objective 3 Determine the price of a bond issue

  12. 9-12 Illustration 9.12—Stated Rate, Market Rate, and the Bond Issue Price

  13. Part C Recording Bonds Payable

  14. 9-14 Learning Objective 4 Account for the issuance of bonds

  15. Recording Bonds Payable—Issued at Face Value • Bonds issue for exactly $100,000, assuming a 7% market interest rate • First semiannual interest payment:

  16. 9-16 Recording Bonds Payable—Issued at Discount

  17. 9-17 Recording Bonds Payable—Issued at Premium

  18. 9-18 Illustration 9.15—Changes in Carrying Value over Time

  19. 9-19 Learning Objective 5 Record the retirement of bonds

  20. Recording Bond Retirements—At Maturity • Retired: buy back of bonds from the investors

  21. Recording Bond Retirements—Before Maturity • Early extinguishment of debt: retirement of debt before its scheduled maturity

  22. Part D Other Long-Term Liabilities

  23. 9-23 Learning Objective 6 Identify other major long-term liabilities

  24. Installment Notes • Requires installment payments • Installment payment:payment includes interest and outstanding balance

  25. Leases • Contractual arrangement between lessor (owner) and lessee (user) to provide the right to use an asset for a specified period of time • Types: • Operating leases: lessor owns the asset, and the lessee simply uses the asset temporarily • Capital leases: lessee buys an asset and borrows the money through a lease to pay for the asset

  26. 9-26 Learning Objective 7 Make financial decisions using long-term liability ratios

  27. Debt Analysis • Business decisions include risk • Failure to properly consider risk could prove costly • Long-term debt management is crucial • Measuring a company’s risk: • Debt to equity ratio • Times interest earned ratio

  28. Debt to Equity Ratio • Measure of financial leverage

  29. Times Interest Earned Ratio • Compares interest expense with income available to pay those charges

  30. 9-30 End of Chapter 9

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