301 chapter 14 edition 15
TRANSCRIPT
Long-Term Liabilities
14
Bonds
Payable
Basic Characteristics of Debt Stated amount (principal or par) Interest rate(s)
Fixed Variable
Interest payment dates Maturity date(s) [Principal payment
date(s)] Term--single maturity date Serial--multiple maturity dates
Bonds Payable
Key terms Par (principal/face value) of the bond Stated/face interest rate--determines
periodic cash interest payments Market/effective interest rate--rate of return
required by the market Maturity date and interest period
Bonds Payable Bonds can be issued at:
par--face interest rate = market interest rate discount--face interest rate < market interest
rate premium--face interest rate > market interest
rate Amortization of premium or discount
Straight line method Effective interest method
Straight-line Amortization
Not GAAP if it yields results which are materially different from the effective interest method.
Yields a constant dollar amount of interest even though the carrying value of the debt is changing.
Effective Interest Method
Yields a constant rate of interest on a changing carrying value of the debt.
Computation of Interest Expense
When bonds are issued at a discount Interest paid + discount amortized
When bonds are issued at a premium Interest paid - premium amortized
Issuance of Bonds & Interest Transactions (Exercise 3, Part 1) 1/1/14 Cash 200,000 Bonds Payable
200,000
7/1/14 Interest Expense 4,500 Cash 4,500 ($200,000 X 9% X 3/12) Quarterly interest
12/31/14 Interest Expense 4,500 Interest Payable 4,500 (Year end adjusting journal entry)
Issuing Bonds at a Discount Brief Exercise 3
Cash (98%x$300,000) 294,000 Discount on Bond Payable 6,000
Bond Payable 300,000
Interest Expense 15,600 Cash 15,000Discount on Bond Payable 600 ($6,000/10 = 600)
Issuing Bonds at a Discount Brief Exercise 3
Interest Expense 15,600Interest Payable
15,000 Discount on Bond Payable 600 ($6,000/10 = $600)
Issuing Bonds at a PremiumExercise 4
1/1/14 Cash (600,000 X 102%) 612,000 Bonds Payable 600,000 Premium on Bond Payable 12,000
7/1/14 Interest Expense 29,700 Premium on Bond Payable 300 Cash 30,000 ($12,000/40 = $300) (600,000 X 10% X6/12)
12/31/14 Interest Expense 29,700 Premium on Bond Payable 300 Interest Payable 30,000
Aumont Company
Exercise 14 - 10Issuance of Bonds at a
Premium--Effective Interest Method
Determination of Proceeds
Interest Paid: Par value X Face rateInterest Paid: $500,000 X 12% = $60,000
n = 5 i = 10% (market)
Principal: $500,000 X .62092 = $ 310,460 Interest: $ 60,000 X 3.79079 = 227,447 PROCEEDS $
537,907
Issuance of the Bonds
1/1/14Cash 537,907
Premium--B/P 37,907 Bond Payable 500,000
Carrying value of the debt at 1/1/14 is $537,907
Amortization of Bond Premium
Interest expense: Carrying Value of Debt X Market Interest Rate $537,907 X .10 = $ 53,791
December 31, 2014Interest Expense 53,791
Premium--BP 6,209 Cash 60,000
Balance Sheet Presentation at 12/31/14
Long Term Liabilities:Bonds Payable $ 500,000
Premium 31,698Carrying Value $ 531,698
Amortization of Bond Premium
Interest expense: Carrying Value of Debt X Market Interest Rate$ 531,698 X .10 = $ 53,170 (rounded)
December 31, 2015Interest Expense 53,170
Premium--BP 6,830 Cash 60,000
Balance Sheet Presentation at 12/31/15
Long Term Liabilities:Bonds Payable $ 500,000
Premium 24,868Carrying Value $
524,868
Amortization of Bond Premium
Interest expense: Carrying Value of Debt X Market Interest Rate$524,868 X .10 = $ 52,487 (rounded)
December 31, 2016Interest Expense 52,487
Premium--BP 7,513 Cash 60,000
Balance Sheet Presentation at 12/31/16
Long Term Liabilities:Bonds Payable $ 500,000
Premium 17,355Carrying Value $
517,355
Bond Issue Costs
Reported as a deferred charge, which is a long-term asset
The issue costs are amortized over the term (life) of the bonds straight-line approach is generally used
Can not be expensed unless the amount is deemed to lack materiality
Bond Issue Costs: BE 10
January 1, 2014 Unamortized Bond Issue Costs 160,000
Cash160,000
December 31, 2014 Interest Expense 16,000
Unamortized Bond Issue Costs 16,000 ($160,000 X 1/10)
Long-Term Debt: Disclosures Required principal payments in each of
the next five years Restrictive debt covenants Collateral, if any Interest paid (3 years) Capitalized interest (3 years) Available sources of cash
Lines of credit Approved sale of debt securities
Special Characteristics of Debt Callable debt
at the option of the issuer at a predetermined price prior to its maturity date
Convertible debt exchange for stock at the option of the investor at a predetermined rate
Extinguishment of DebtPrior to Maturity
An ordinary gain or loss is reported in the income statement in the period of the early extinguishment (redemption).
Ordinary gain/loss = Reacquisition cost - Carrying value at the date of extinguishment (redemption)
Early Extinguishment: BE 11 Reacquisition cost: $500,000 X 99% = $495,000 Carrying Value: Bond Payable
$500,000 Premium--BP 15,000Unamort. Issue Cost (5,250) 509,750 Gain on Redemption $ 14,750
Bonds Payable 500,000 Premium on Bond Payable 15,000
Unamortized Issue Costs 5,250 Cash495,000 Gain on Redemption of Bonds 14,750
Long-term Notes Payable
In substance the same as bonds Valuation: Present value of the
future cash flows Types of notes
interest bearing at market rate interest bearing at a rate below market non-interest bearing
Non-interest bearing noteExercise 16
January 1, 2014
Land 200,000 Discount on Note Payable 137,012
Notes Payable 337,012
December 31, 2014
Interest Expense 22,000 Discount on Note Payable 22,000 ($200,000 X 11%)
Interest Bearing Note at a Rate Below Market: Exercise 16
Determination of the Present Value of the Note (Equipment acquisition cost) n = 8 i = 11%1. Principal ($250,000 X .43393) $ 108,4822. Interest ($15,000 X 5.14612) 77,192 Present value of the note $ 185,674
Interest Paid: $250,000 X 6% = $15,000January 1, 2014
Equipment 185,674 Discount on Note Payable 64,326 Notes
Payable 250,000
Interest Bearing Note at a Rate Below Market: Exercise 16
Interest Expense: $185,674 X 11% = $20,424Interest Paid: $250,000 X 6% = $15,000
December 31, 2014
Interest Expense 20,424 Discount on Note Payable 5,424 Cash 15,000
End of Chapter 14