LONG-TERM LIABILITIES
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1 Chapter 14 LONG-TERM LIABILITIES PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Winston Kwok, Ph.D., CA Copyright 2015 by McGraw-Hill Education (Asia). All rights reserved
2 14-2 A1 BOND FINANCING Advantages Bonds do not affect owner control. Interest on bonds is tax deductible. Bonds can increase return on equity. Disadvantages Bonds require payment of both periodic interest and par value at maturity. Bonds can decrease return on equity.
3 14-3 A1 BOND TRADING Bonds are securities that can be purchased or sold in the securities markets. They have a market value which is expressed as a percent of their par value. The closing price indicates that the IBM bond is being sold at % of face value.
4 14-4 P1 BOND ISSUANCES Transaction on the Bond Issue Date Corporation Investors Bond Selling Price Bond Certificate
5 14-5 P1 BOND ISSUANCES Transactions during the bond life Bond Interest Payments Corporation Bond Interest Payments Investors Bond Issue Date Interest Payment = Bond Par Value Stated Interest Rate x Time
6 14-6 P1 BOND ISSUANCES Transaction on the Maturity Date Corporation Investors Bond Face Value
7 14-7 P1 ISSUING BONDS AT PAR On Jan. 1, 2011, a company issued the following bonds: Par Value: $800,000 Stated Interest Rate: 9% Interest Dates: 6/30 and 12/31 Maturity Date = Dec. 31, 2030 (20 years)
8 14-8 P1 ISSUING BONDS AT PAR On June 30, 2011, the issuer of the bond pays the first semiannual interest payment of $36,000. $800,000 9% ½year = $36,000 This entry is made every six months until the bonds mature.
9 14-9 P1 ISSUING BONDS AT PAR On December 31, 2030, the bonds mature and the issuer of the bond pays face value of $800,000 to the bondholders.
10 14-10 P1 BOND DISCOUNT OR PREMIUM
11 14-11
12 14-12 P2 ISSUING BONDS AT A DISCOUNT Fila issues bonds with the following provisions: Par Value: $100,000 Issue Price: % of par value Stated Interest Rate: 8% Market Interest Rate: 10% Interest Dates: 6/30 and 12/31 Bond Date: Dec. 31, 2011 Maturity Date: Dec. 31, 2013 (2 years) } Bond will sell at a discount.
13 P2 ISSUING BONDS AT A DISCOUNT On Dec. 31, 2011, Fila should record the bond issue. Par value $ 100,000 Cash proceeds 96,454 Discount $ 3,546 *$100,000 x % Contra-Liability Account
14 P2 EFFECTIVE INTEREST AMORTIZATION Effective Interest Amortization Schedule Interest Interest Discount Unamortized Carrying Date Payment Expense Amortization* Discount Value 12/31/2011 $ 3,546 $ 96,454 6/30/2012 $ 4,000 $ 4,823 $ 823 2,723 97,277 12/31/2012 4,000 4, ,859 98,141 6/30/2013 4,000 4, ,048 12/31/2013 4,000 4, ,000 $ 16,000 $ 19,546 $ 3,546 * Rounded. $96,454 5% = $4,823 $100,000 - $2,723 = $97,277
15 P2 AMORTIZING A BOND DISCOUNT 14-15
16 14-16 P3 ISSUING BONDS AT A PREMIUM Adidas issues bonds with the following provisions: Par Value: $100,000 Issue Price: % of par value Stated Interest Rate: 12% Market Interest Rate: 10% Interest Dates: 6/30 and 12/31 Bond Date: Dec. 31, 2011 Maturity Date: Dec. 31, 2013 (2 years) } Bond will sell at a premium.
17 14-17 P3 ISSUING BONDS AT A PREMIUM On Dec. 31, 2011, Adidas will record the bond issue as: Par value $ 100,000 Cash proceeds 103,546 * Premium $ 3,546 *$100,000 x % Adjunct-Liability Account
18 P3 AMORTIZING A BOND PREMIUM 14-18
19 14-19 P2 BOND PRICING Cash Outflows related to Interest Payments Cash Outflows for par value at end of Bond life
20 14-20 P2 ISSUING BONDS AT A DISCOUNT Fila issues bonds with the following provisions: Par Value: $100,000 Issue Price:? Stated Interest Rate: 8% Market Interest Rate: 10% Interest Dates: 6/30 and 12/31 Bond Date: Dec. 31, 2011 Maturity Date: Dec. 31, 2013 (2 years)
21 P2 PRESENT VALUE OF A DISCOUNT BOND To calculate Present Value, we need relevant interest rate and number of periods. Semiannual rate = 5% (Market rate 10% 2) Semiannual periods = 4 (Bond life 2 years 2) $100,000 8% ½ = $4,000
22 14-22 P4 BOND RETIREMENT Retirement of the Fila bonds at maturity for $100,000 cash. Because any discount or premium will be fully amortized at maturity, the carrying amount of the bonds will be equal to par value.
23 14-23 P4 BOND RETIREMENT Retirement of Bonds before Maturity Carrying Amount > Retirement Price = Gain Carrying Amount < Retirement Price = Loss Assume that $100,000 of callable bonds will be retired on July 1, 2011, after the first interest payment. The bond carrying amount is $104,500.The bonds have a call premium of $3,000.
24 14-24 P4 BOND RETIREMENT By Conversion On January 1, $100,000 par value bonds of Converse, with a carrying amount of $100,000, are converted to 15,000 ordinary shares of $2 par value. 15,000 shares $2 par value per share
25 14-25 C1 LONG-TERM NOTES PAYABLE Cash Company Note Payable Lender When is the repayment of the principal and interest going to be made? Note Date Note Maturity Date
26 14-26 C1 LONG-TERM NOTES PAYABLE Single Payment of Principal plus Interest Company Lender Single Payment of Principal plus Interest Note Date Note Maturity Date
27 14-27 C1 LONG-TERM NOTES PAYABLE Company Regular Payments of Principal plus Interest Lender Regular Payments of Principal plus Interest Note Date Payments either can be equal principal payments plus interest or equal payments. Note Maturity Date
28 14-28 C1 INSTALLMENT NOTES On January 1, 2011, Foghog borrows $60,000 from a bank to purchase equipment. It signs an 8% installment note requiring 6 annual payments of principal plus interest. Compute the periodic payment by dividing the face amount of the note by the present value factor. Computation Principal divided by PV factor Table Value Present Value PV Table of Payment Annuity of $1 (B.3) ,000 12,979
29 14-29 C1 INSTALLMENT NOTES WITH EQUAL PAYMENTS
30 14-30 P5 INSTALLMENT NOTES WITH EQUAL PAYMENTS Let s record the first payment made on December 31, 2011 by Foghog to the bank. Refer back to the amortization schedule to make the December 31, 2012 payment on the note.
31 C1 MORTGAGE NOTES AND BONDS A legal agreement that helps protect the lender if the borrower fails to make the required payments. Gives the lender the right to be paid out of the cash proceeds from the sale of the borrower s assets specifically identified in the mortgage contract.
32 14-32 A2 FEATURES OF BONDS AND NOTES Secured and Unsecured Convertible and Callable Term and Serial Registered and Bearer
33 14-33 A3 DEBT-TO-EQUITY RATIO Debt-to- Equity Ratio = Total Liabilities Total Equity This ratio helps investors determine the risk of investing in a company by dividing its total liabilities by total equity. Adidas
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