MGMT 351 Lecture 4 Outline of Last Lecture I. Long-Term Liabilities a. Notes PayableOutline of Current Lecture I. Long-Term Liabilities Cont’d a. Long-term Bonds Payable Current LectureRECAP: Bonds Payable: securities issued for long-term debt financing. They are a liability to the issuer and an investment asset to the buyer Bond Indenture: A contract that contains the terms on the bond issued such as: face value, interest rate (or no interest), and maturity date- Companies either go through an underwriter (investment bank), or directly to the general investors - Pricing bonds are the same way as long-term notes payable - The price being the cash the issuer received form buyers o If coupon rate is less than yield rate discount o If coupon rate is more than yield rate  premium o If they are equal, then the bond is issued at Face Value Journal Entries 1. Issuance 2. Interest payment3. At FYE- adjust for amortization and update interest expense 4. Retire at maturity - Now and forever assume effective rate interest amortization because Straight-line is hardly used in the real world These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.- BV, also called carrying value - You can either retire a bond early or at maturity- if early you update the I/Exp and Amortization of discount and premium firstEXAMPLES DONE IN CLASSHP12-21. BP3/1/14 = $10,702 (Present Value- Bond Price of bond today)—(PV, 8, .03) + (PVOA, 8, .03)1. 8= number of period, .03 is half the discount ratePV at 5/1 = 10,702 – (78.94)(2/6) = 10, 676; you are accounting for the amount of months with (2/6)Date Cash Int. Int. Exp. Amort. Balance3/1/14 - - - 10,702 5/1/14 133 107.02 25.98 10,6769/1/14 400 321.06 78.94 10,6233/1/15 400 318.69 81.31 10,5429/1/15 400 316.25 83.75 10,4583/1/16 400 313.74 86.26 10,3729/1/16 400 311.15 88.85 10,2833/1/17 400 3.08.49 91.51 10,1919/1/17 400 305.74 94.26 10,0973/1/18 400 302.91 97.09 10,000-You can do this in excel 2. 5/1/14: (1) Cash 10,676 B/Pay 10,000B. Prem 676(2) Cash 133 I/Pay 133 (400)(2/6)- You are allocating the 6 month cash interest by the 2 months 9/1/14: I/Pay 133 Cash 400 - you basically get the 133 backI/Exp 214 (321.06)(4/6)B. Prem 5312/31/14: I/Exp 213 I/Pay 267(FYE) B. Prem 543/1/15: I/Pay 267 Cash 400 I/Exp 106  2 month I/ExpB. Prem 27  2 months Amortization. 3. B/S at 12/31/2014Noncurrent Liab: Bonds 10,000Prem. 569 ---- BV is 10,569 4. Early Retirement4/1/15: - Update interest & amortization of discount or premium first:I/Exp 53 (316.25)(1/6) Cash 67 (400)(1/6)B. Prem 14 - BV at 4/1/15 = $10,528 = Face 10k + premium balance= BV 10,542- prem. Amort (83.75)(1/6) - Loss on retirement = $972 price paid BV- existing BV B/Pay 10000 Cash 11500- in problem B. Prem 528 (prem. Bal) Loss 9725. Zero coupon: BP3/1/14 = $7,8945/1/14: Cash 7,894 (PV, 8, .03) – no interest B/Pay 10,000B. Disct. 2,1069/1/14: I/Exp 237 B. Disct 237 (.03)(7894) – viewed as prepaid I/Exp, so its amortized 12/31/14: I/Exp 163 B. Disct 163 -- interest I/Exp each period Why do people buy non-interest bearing bonds for investment?They buy it at a discount. Interest is still there, its implicit.Restructuring Troubled Debt -A trouble debt restructuring is a special arrangement under which the creditor grants a concession to the debtor because the debtor’s financial difficulties (All Long-Term Debt) 1. Full settlement of debt- by giving something (noncash asset)—Asset Swap; or giving stock of the debtor – Equity Swap a. Asset Swaps usually results in a gaini. If MV is higher than BV = Gain on asset given, because of appreciation of value is asset since acquired by the debtor 2. Continuation of debt with modified