bg financial accounting 2 chapter 8 5274

CHAPTER 8 LONG TERM LIABILITIES 8 1 Bond 8 2 Other Long Term liabilities 8 3 Presentation and Disclosure FINANCIAL ACCOUNTING 2 CHAPTER 8 LONG TERM LIABILITIES OBJECTIVE After studying this chapter, y[.]

CHAPTER 8: LONG-TERM LIABILITIES

8.1 Bond

8.2 Other Long-Term liabilities

8.3 Presentation and Disclosure

CHAPTER 8: LONG-TERM LIABILITIES

OBJECTIVE: After studying this chapter, you should be able to:

 Identify Bond and accounting for Bond

 Recognition and accounting for other long-term liabilities

 Understand the requirement of disclosure of long-term liabilities

8.1 Bond

8.1.1 Types of bond

8.1.2 Accounting for bond

8.1.1 TYPES OF BOND

Issuing Procedures

In authorizing the bond issue, the board of directors must stipulate the number of bonds to be authorized, total face value, and contractual interest rate

 The face value is the amount of principal the issuing company must

pay at the maturity date.

 The maturity date is the date that the final payment is due to the

investor from the issuing company.

 The contractual interest rate(stated rate): is the rate used to determine

the amount of cash interest the borrower pays and the investor receives 39

8.1.1 TYPES OF BONDS

TYPES OF BONDS

SECURED AND UNSECURED BONDS

TERM AND SERIAL BONDS

REGISTERED AND BEARER BONDS

CONVERTIBLE AND CALLABLE BONDS

NORMAL BOND, DEEP DISCOUNT BOND, ZERO COUPON BOND 40

8.1.2 Accounting for bond

8.1.2.1 Accounting for bond at issuing date

8.1.2.2 Accounting for interest of bond

8.1.2.3 Accounting for bond at maturity date

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8.1.2 Accounting for bond

8.1.2.1 Accounting for bond at issuing date

-Issued at par

-Issued at discount

-Issued at premium

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ISSUE PRICE = FACE VALUE

ISSUED AT PAR

Dr Cash: face value

Cr Bonds Payable: face value

In SOFP, bonds payable is in the long-term liabilities

Accounting treatment at issuing date:

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ISSUE PRICE < FACE VALUE: DISCOUNTED BOND

Dr Cash: issue price

Dr Discount on Bonds Payable

Cr Bonds Payable: face value

In SOFP, bonds payable is in the long-term liabilities

Accounting treatment at issuing date:

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ISSUED AT DISCOUNT

Dr Interest expense (borrowing cost)

Cr Discount on Bonds Payable

Accounting treatment at each year end (straight line method):

ISSUE PRICE > FACE VALUE PREMIUM BOND

Dr Cash: issue price

Cr Bonds Payable: face value

Cr Premium on Bonds Payable

In SOFP, bonds payable is in the long-term liabilities

Accounting treatment at issuing date:

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ISSUED AT PREMIUM

Dr Premium on Bonds Payable

Cr Interest expense (borrowing cost)

Accounting treatment at each year end (straight line method):

At the end of each accounting period, recording interest expense as well as the cash paid for interest:

Case 1: interest payment periodically

At the end of accounting period:

Dr: Interest expense

Cr Cash

At issuing date, the issuer must pay interest in full for the whole period, the amount of cash payment will be recorded as Prepayment.

Case 2: interest payment in full at issuing date

Dr Prepayment for Interest of bond

At the maturity date, issuers can settle the interest for the whole bond period:

Case 3: interest payment only at maturity date

At the end of accounting period:

Dr: Interest expense

Cr Accrual for interest (interest payable)

At the maturity date:

Dr: Accrual for interest (interest payable)

Cr: Cash

 At Maturity Date: In General, A company often retire bonds at the maturity date which was stated

on bond certificate

 Before Maturity Date: A company may decide to retire bonds before maturity to reduce interest cost and to remove debt from its SOFP

A company can retire debt early only if it has sufficient cash resources

8.1.2.3 ACCOUNTING FOR BOND AT MATURITY DATE

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 At Maturity Date

Regardless of the issue price of bonds, the book value of the bonds at maturity will equal their face value The journal entry is:

Dr Bond Payable: face value

Cr Cash: face value

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8.1.2.3 ACCOUNTING FOR BOND AT MATURITY DATE

 Before Maturity Date

(1) Eliminate the carrying value of the bonds at the redemption date;

(2) Record the cash paid

(3) Recognize the gain or loss on redemption

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8.1.2.3 ACCOUNTING FOR BOND REDEEMPTION BEFORE MATURITY DATE

 Before Maturity Date

Dr Bonds Payable: face value

Dr Premium on Bonds Payable : carrying amount of bond- face value

Dr Loss on Bond Redemption: balance

Cr Cash: Redeemable value

Cr Gain on Bond Redemption: balance

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8.1.2.3 ACCOUNTING FOR BOND REDEEMPTION BEFORE MATURITY DATE

8.2 Other Long-Term liabilities 8.2.1 Long-term note payables 8.2.2 Long-term loan

Long-term notes payable are interest-bearing notes payable, the term of the notes exceeds one year

A long-term note may be secured by a mortgage that pledges title to specific

assets as security for a loan

Example: approximately 18% of McDonald’s long-term debt related to mortgage notes on land,

buildings, and improvements

8.2.1 LONG-TERM NOTES PAYABLE

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Accounting for notes and bonds is quite similar Like a bond, a note is valued at the present value of its future interest and principal cash flows The company amortizes any discount or premium over the life

of the note, just as it would the discount or premium on a bond

8.2.1 LONG-TERM NOTES PAYABLE

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8.3.1 NOTES ISSUED AT FACE VALUE

Dr Cash: face value

Cr Note Payable: face value

In SOFP, Note payable is in the long-term liabilities

Accounting treatment at issuing date

 At Maturity Date

Dr Note Payable: face value

Cr Cash: face value

REDEEMING NOTES

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 At Maturity Date

Regardless of the issue price of Notes, the book value of the bonds at maturity will equal their face

value Assuming that the company pays and records separately the interest for the last interest period, Candlestick records the redemption of its bonds at maturity as follows ?

REDEEMING NOTES

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If a company issues a zero-interest-bearing (non-interest-bearing) note11 solely for cash, it measures the note’s present value by the cash received The implicit interest rate is the rate that equates the cash received with the amounts to be paid in the future.

The issuing company records the difference between the face amount and the present value (cash

received) as a discount and amortizes that amount to interest expense over the life of the note

NOTES NOT ISSUED AT FACE VALUE

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Long-term loan: a business can raise debt capital by other long-term loan form individual as well as financial institutions such as: bank, trust union, funds,….

The business usually using a mortgage note payable in finance market

A mortgage note payable is a promissory note secured by a document called a mortgage that pledges

title to property as security for the loan

 The borrower usually receives cash for the face amount of the mortgage note

 The face amount of the note is the true liability, and no discount or premium

8.2.2 LONG-TERM LOAN

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 Mortgages may be payable in full at maturity or in installments over the life of the loan

 On the SOFP, The issuer should report the mortgage note payable as a liability using a title such as

“Mortgage Payable” or “Notes Payable—Secured,” with a brief disclosure of the property pledged in notes to the financial statements

8.3.3 MORTGAGE NOTES PAYABLE

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Presentation and Disclosure62

NON-CURRENT LIABILITIES

-BONDS

-LONG-TERM NOTE PAYABLES

-MORTGATE NOTES PAYABLES

-OTHER LONG-TERM PAYABLES

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PRESENTATION AND DISCLOSURE

STATEMENT OF FINANCIAL POSITION