ch13 accounting and reporting of long-term liabilities

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Accounting and Reporting of Long-Term Liabilities

Chapter

13Intermediate Accounting 12th Edition Kieso, Weygandt, and Warfield

Chapter 13-1

Prepared by Coby Harmon, University of California, Santa Barbara

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Learning Objectives1. Describe the formal procedures associated with issuing long-term debt.

2.3. 4. 5. 6.

Identify various types of bond issues.Describe the accounting valuation for bonds at date of issuance. Apply the methods of bond discount and premium amortization. Describe the accounting for the extinguishment of debt. Explain the accounting for long-term notes payable.

7.8.Chapter 13-2

Explain the reporting of off-balance-sheet financing arrangements.Indicate how to present and analyze long-term debt.

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Current Liabilities and Contingencies

Bonds Payable

Long-Term Notes Payable

Reporting and Analysis of LongTerm Debt

Issuing bondsTypes and ratings Valuation Effectiveinterest method Costs of issuing Treasury bonds Extinguishment

Notes issued at face valueNotes not issued at face value Special situations Mortgage notes payable

Off-balancesheet financingPresentation and analysis

Chapter 13-3

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Bonds PayableLong-term debt consists of probable future

sacrifices of economic benefits arising from presentobligations that are not payable within a year or the operating cycle of the company, whichever is longer.

Examples:Bonds payable Notes payable Mortgages payable Pension liabilities Lease liabilitiesLong-term debt has various covenants or restrictions.

Chapter 13-4

LO 1 Describe the formal procedures associated with issuing long-term debt.

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Issuing BondsBond contract known as a bond indenture.Represents a promise to pay:(1) sum of money at designated maturity date, plus (2) periodic interest at a specified rate on the

maturity amount (face value).

Paper certificate, typically a $1,000 face value. Interest payments usually made semiannually. Purpose is to borrow when the amount of capital needed is too large for one lender to supply.Chapter 13-5

LO 1 Describe the formal procedures associated with issuing long-term debt.

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Types of BondsCommon types found in practice:Secured and Unsecured (debenture) bonds, Term, Serial, and Callable bonds, Convertible bonds, Commodity-backed bonds, Deepdiscount bonds (Zero-interest debenture bonds),

Registered bonds and bearer or coupon bonds,Income and Revenue bonds.

Chapter 13-6

LO 2 Identify various types of bond issues.

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Valuation of Bonds – Discount and PremiumBetween the time the company sets the terms and the time it issues the bonds, the market conditions and the financial position of the issuing corporation may change significantly. Such changes affect the marketability of the bonds and thus their selling price. The investment community values a bond at the present value of its expected future cash flows, which consist of (1) interest and (2) principal.

Chapter 13-7

LO 3 Describe the accounting valuation for bonds at date of issuance.

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Valuation of B

onds – Discount and PremiumInterest RatesStated, coupon, or nominal rate = The interest rate written in the terms of the bond indenture. Market rate or effective yield = rate that provides an acceptable return on an investment commensurate with the issuer’s risk characteristics. Rate of interest actually earned by the bondholders.

Chapter 13-8

LO 3 Describe the accounting valuation for bonds at date of issuance.

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Valuation of Bonds – Discount and PremiumHow do you calculate the amount of interest that is actually paid to the bondholder each period? (Stated rate x Face Value of the bond)

How do you calculate the amount of interest that is actually recorded as interest expense by the issuer of the bonds?(Market rate x Carrying Value of the bond)

Chapter 13-9

LO 3 Describe the accounting valuation for bonds at date of issuance.

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Valuation of Bonds – Discount and PremiumCalculating the Selling Price of a Bond1- Depends on Market Rate of interest2- Computation of selling price: - PV of maturity value, plus

- PV of interest payments, at what rate?- Market rate of interest 3- Semi-annual interest paying bonds: - Require doubling the periods - Halving the interest rateChapter 13-10

LO 3 Describe the accounting valuation for bonds at date of issuance.

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Valuation of Bonds – Discount and PremiumAssume Stated Rate of 8%Market Interest Bonds Sold At

6% 8% 10%Chapter 13-11

Premium Face Value Discount

LO 3 Describe the accounting valuation for bonds at date of issuance.

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Bonds Issued at ParIllustration Three year bonds are issued at face value of $100,000 on Jan. 1, 2007, with a stated interest rate of 8%. Interest paid annually on Dec. 31. Calculate the issue price of the bonds, market interest rate of 8%.

Market Rate 8% (PV for 3 periods at 8%)Principal Interest $100,000 x 0.79383 = $ 79,383 8,000 x 2.57710 = 20,617 Present value 100,000 Face value 100,000

Discount

$

0

Chapter 13-12

LO 3 Describe the accounting valuation for bonds at date of issuance.

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Bonds Issued at ParIllustration Three year bonds are issued at face value of $100,000 on Jan. 1, 2007, a stated interest rate of 8%, and market rate of 8%.Cash Date 1/1/07 12/31/07 12/31/08 12/31/09 $ 8,000 8,000 8,000 $ 8,000 8,000 8,000 Paid Interest Expense Carrying Amount $ 100,000 100,000 100,000 100,000

Chapter 13-13

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