Slide 1Long-term LiabilitiesBond Basics STUDY OBJECTIVE 1Why Issue Bonds?Disadvantages of BondsTypes of BondsTypes of Bonds: Term and Serial BondsTypes of Bonds: Registered and BearerConvertible and CallableAuthorizing a Bond IssueIssuing ProceduresSlide 12Bond TradingDetermining the Market Value of BondsAccounting for Bond Issues: Issuing Bonds at Face ValuePresent Value: Two Ways of Looking at ItAccounting for Bond Issues Issuing Bonds at Face ValueSlide 18Interest rates and bond pricesAccounting for Bond Issues Discount or Premium on BondsIssuing Bonds at a DiscountStatement presentation of discount on bonds payableTotal cost of borrowing - bonds issued at discountAlternative computation of total cost of borrowing - bonds issued at discountIssuing Bonds at a PremiumStatement presentation of bond premiumTotal cost of borrowing-bonds issued at a premiumAlternative computation of total cost of borrowing-bonds issued at a premiumRedeeming Bonds at Maturity STUDY OBJECTIVE 3Bond RetirementsRedeeming Bonds before MaturityConverting Bonds into Common StockOther Long-Term Liabilities Study Objective 4Mortgage installment payment scheduleLong-term Notes Payable EntriesOperating LeasesCapital LeasesSlide 38Capital Lease EntriesPresentation and Analysis of Long-Term LiabilitiesBalance sheet presentation of long-term liabilitiesDebt to Total AssetsTimes Interest Earned RatioHomework: Check Wiley Plus!CHAPTER 16LONG-TERM LIABILITIESAfter studying this chapter, you should be able to:1 Explain why bonds are issued.2 Prepare the entries for the issuance of bonds and interest expense.3 Describe the entries when bonds are redeemed or converted.4 Describe the accounting for long-term notes payable.5 Contrast the accounting for operating and capital leases.6 Identify the methods for the presentation and analysis of long-term liabilities.Long-term LiabilitiesObligations that are expected to be paid after one yearInclude bonds, long-term notes, and lease obligationsBond BasicsSTUDY OBJECTIVE 1Bonds interest-bearing notes payableissued by corporations, universities, and governmental agencies like common stock, can be sold in small denominations (usually a thousand dollars)attract many investorsTo obtain large amounts of long-term capital, corporate management usually must decide whether to issue bonds or to use equity financing (common stock).Why Issue Bonds?Long-term financing, bonds, offer thefollowing advantages over commonstock:1)Stockholder control not affected2)Tax savings 3)Earnings per share may be higher, since no additional stock is issued.Disadvantages of Bonds1)Interest must be paid on a periodic basis, regardless of the company’s financial position!2)Principal (face value) must be repaid at maturity1) Secured bonds Specific assets of the issuer pledged as collateral for the bonds( a mortgage bond is secured by real estate) 2) Unsecured bonds Issued against the general credit of the borrower; they are also called debenture bonds. Types of Bonds3) Term bondsbonds that mature at a single specified future date4) Serial bondsbonds that mature in installmentsTypes of Bonds: Term and Serial Bonds2005 2006 2007 20082005 2006 2007 2008Types of Bonds:Registered and Bearer5)Registered bondsissued in the name of the owner and have interest payments made by check to bondholders of record 6)Bearer or coupon bonds not registered; thus bondholders must send in coupons to receive interest paymentsPay to: BearerPay to: Joe SmithConvertible and CallableConvertibleCan convert the bonds into common stock at holder’s optionCallableSubject to call and retirement at a stated dollar amount prior to maturity at the option of the issuer. This feature is included in most corporate bond issues.RegisteredStockAuthorizing a Bond IssueState laws grant corporations the power to issue bonds as well as stock!approval by both the board of directors and stockholders is usually requiredBoard of directors stipulate the number of bonds to be authorized, total face value, and contractual interest rate. As with stock, permission must be received to issue bonds in excess of the authorized amount.Issuing ProceduresFace value amount of principal the issuer must pay at the maturity dateContractual interest rate, or stated raterate used to determine the amount of cash interest the borrower pays and the investor receivesBond indenture terms of the bond issue are set forth in a formal legal document, including maintaining records and the custody of unissued bonds. Bond certificatesprovide information such as name of issuer and maturity date, and are printed.Bond CertificateBond TradingCorporate bondstraded on national securities exchanges, like stocksbondholders have the opportunity to convert their holdings into cash by selling the bonds at the current market price, as with stocksBond prices are quoted as a percentage of the face value of the bond (usually $1,000). Example: the bond is trading at 92. Transactions between a bondholder and other investors are not journalized by the issuing corporation. Why? A corporation only makes journal entries when it issues or buys back bonds, and when bondholders convert bonds into common stock.Determining the Market Value of BondsThe market value (present value)of a bond is determined by:1) the dollar amounts to be received2) the length of time until the amounts are received3) the market rate of interest, which is the rate investors demand for loaning funds. The process of finding the present value is referred to as discounting the future amounts.Accounting for Bond Issues:Issuing Bonds at Face Value 1,000,000 1,000,000Bonds may be issued at face value, below face value (at a discount), or above face value (at a premium). They also are sometimes issued between interest dates. Assume that Devor Corporation issues 1,000, 10-year, 9% $1,000 bonds dated January 1, 2005, at 100 (100% of face value). The entry to record the sale is:Bonds payable are reported in the long-term liability section of the balance sheet because the maturity date is more than one year away.Present Value: Two Ways of Looking at It1. If I invest $10,000 on 1/1/2006 at 5% per year, what will my investment be worth in 20 years?2. If I want to have $1,000,000 in twenty years, and the going interest rate is 9%, how much do I need to invest every year?Accounting for Bond IssuesIssuing Bonds