11 Long-term Liabilities And
Receivables
Accounting School ·Zhongnan
University of Economics & Law
ntermediate
Accounting
I
中级会计学
1,Reasons for Issuance of Long-
Term Liabilities
? Debt financing may be the only available
source of funds.
? Debt financing may have a lower cost.
? Debt financing offers an income tax
advantage.
? The voting privilege is not shared.
? Debt financing offers the opportunity for
leverage.
Intermediate Accounting 11 Long-term Liabilities And Receivables
Characteristics of Bonds ? Debenture bonds
? Mortgage bonds
? Registered bonds
? Coupon bonds
? Zero-coupon bonds
? Callable bonds
? Convertible bonds
? Serial bonds
Intermediate Accounting 11 Long-term Liabilities And Receivables
2,Bonds Payable
Steps a Company Must Follow When It
Issues Bonds
? It must receive approval from regulatory
authorities,such as the Securities and
Exchange Commission.
? The company must set the terms of the bond
issue,such as the contract rate and the maturity
date.
? It must make a public announcement of its
intent to sell the bonds on a particular date and
print the bond certificates.
Intermediate Accounting 11 Long-term Liabilities And Receivables
Recording the Issuance of Bonds
Company J sells bonds with a face value of $400,000
on the authorization date at 102.
Cash ($400,000 x 1.02) 408,000
Bonds Payable 400,000
Premium on Bonds Payable 8,000
Company M sells bonds with a face value of
$400,000 on the authorization date at 97.
Cash ($400,000 x,97) 388,000
Discount on Bonds Payable 12,000
Bonds Payable 400,000
A contra account—
subtracted from
Bonds Payable
Intermediate Accounting 11 Long-term Liabilities And Receivables
Recording the Issuance of Bonds
On March 1,2004,Grimes Corporation issues
$800,000 of 10-year bonds dated January 1,2004 at
par,The bonds have a contract (stated) interest rate of
12% and pay interest semiannually.
Cash 816,000
Interest Expense 16,000
Bonds Payable 800,000
$800,000 x 0.12 x 2/12Continued
Intermediate Accounting 11 Long-term Liabilities And Receivables
Recording the Issuance of Bonds
On July 1,2004,Grimes Corporation records the
semiannual interest payment.
Interest Expense 48,000
Cash 48,000
$800,000 x 0.12 x 6/12
Interest Expense
48,000 16,000
The balance of $32,000 represents the
interest cost since the bonds were
issued.
32,000
Intermediate Accounting 11 Long-term Liabilities And Receivables
Amortizing
Discounts and
Premiums
Intermediate Accounting 11 Long-term Liabilities And Receivables
Issuing Bonds at a Discount
Jet Company sells bonds for $92,976.39 on
January 1,2004,The bonds have a face value
of $100,000 and a 12% stated annual interest
rate,Interest is paid semiannually and the
bonds mature on December 31,2008.
Cash 92,976.39
Discount on Bonds Payable 7,023.61
Bonds Payable 100,000.00
Continued
Straight-Line Method
Intermediate Accounting 11 Long-term Liabilities And Receivables
Jet Company records the first interest
payment on June 30,2004.
Interest Expense 6,702.36
Discount on Bonds Payable 702.36
Cash 6,000.00
$6,000 + $702.36
Issuing Bonds at a Discount
$7,023.61 ÷ 10$100,000 x 0.12 x 1/2
Straight-Line Method
Intermediate Accounting 11 Long-term Liabilities And Receivables
After this second entry,the long-term liabilities
section of Jet’s December 31,2004 balance
sheet would appear as follows:
Bonds payable $100,000.00
Less,Discount on Bonds Payable (5,618.89 )
$ 94,381.11
$7,023.61 – $702.36 – $702.36
Issuing Bonds at a Discount
Straight-Line Method
Intermediate Accounting 11 Long-term Liabilities And Receivables
Issuing Bonds at a Premium
Jet Company sold bonds on January 1,2004 for
$107,721.71,Interest is paid semiannually.
Cash 107,721.71
Bonds Payable 100,000.00
Premium on Bonds Payable 7,721.71
Continued
Straight-Line Method
Intermediate Accounting 11 Long-term Liabilities And Receivables
Issuing Bonds at a Premium
The first interest payment is made on June 30.
Interest Expense 5,227.83
Premium on Bonds Payable 772.17
Cash ($100,0000 x 0.12 x 1/2) 6,000.00
Continued
Straight-Line Method
$7,721.71 ÷ 10
Intermediate Accounting 11 Long-term Liabilities And Receivables
Issuing Bonds at a Premium
After this second entry,the long-term
liabilities section of Jet’s December 31,2004
balance sheet would appear as follows:
Bonds payable $100,000.00
Add,Premium on Bonds Payable 6,177.37
$106,177.37
$7,721.71 – $772.17 – $772.17
Straight-Line Method
Intermediate Accounting 11 Long-term Liabilities And Receivables
Determining the Selling Price
Using the straight-line method,Interest
Expense is the same every year—which
is not realistic when a premium or
discount is involved,Instead,the
effective-interest method allows for a
stable interest rate per year.
Intermediate Accounting 11 Long-term Liabilities And Receivables
Determining the Selling Price
Jet Company desires to sell $100,000 of 5-year bonds
paying semiannual interest with a stated rate of 12%,
The current effective interest rate is 14%.
Present value of principal
($100,000 x 0.508349) $ 50,834.90
Present value of interest
($6,000 x 7.023582) 42,141.49
$ 92,976.39
Less face value (100,000.00)
Discount $ 7,023.61
Intermediate Accounting 11 Long-term Liabilities And Receivables
Determining the Selling Price
Jet Company desires to sell $100,000 of 5-year bonds
paying semiannual interest with a stated rate of 12%,
The bonds are sold to yield 14% interest.
Present value of principal
($100,000 x 0.613913) $ 61,391.30
Present value of interest
($6,000 x 7.721735) 46,330.41
$107,721.71
Less face value (100,000.00)
Premium $ 7,721.71
Intermediate Accounting 11 Long-term Liabilities And Receivables
Issuing Bonds at a Discount
Jet Company sells bonds for $92,976.39 on
January 1,2004,The bonds have a face value
of $100,000 and a 12% stated annual interest
rate,Interest is paid semiannually and the
bonds mature on December 31,2008.
Cash 92,976.39
Discount on Bonds Payable 7,023.61
Bonds Payable 100,000.00
Continued
Effective Interest
Intermediate Accounting 11 Long-term Liabilities And Receivables
Jet Company records the first interest
payment on June 30,2004.
Interest Expense 6,508.35
Discount on Bonds Payable 508.35
Cash 6,000.00
Issuing Bonds at a Discount
Effective Interest
$92,976.39 x 0.14 x 1/2
$6,508.35 – $6,000.00$100,000 x 0.12 x 1/2
Intermediate Accounting 11 Long-term Liabilities And Receivables
Jet Company records the second interest
payment on December 31,2004.
Interest Expense 6,543.93
Discount on Bonds Payable 543.93
Cash 6,000.00
Issuing Bonds at a Discount
Effective Interest
($92,976.39 + $508.35) x 0.14 x 1/2
$100,000 x 0.12 x 1/2
$6,43.93 – $6,000.00
Intermediate Accounting 11 Long-term Liabilities And Receivables
Issuing Bonds at a Premium
Jet Company sold bonds on January 1,2004 for
$107,721.71,Interest is paid semiannually.
Cash 107,721.71
Bonds Payable 100,000.00
Premium on Bonds Payable 7,721.71
Continued
Effective Interest
Intermediate Accounting 11 Long-term Liabilities And Receivables
Issuing Bonds at a Premium
The first interest payment is made on June 30.
Interest Expense 5,386.09
Premium on Bonds Payable 613.91
Cash 6,000.00
Continued
Effective Interest
$107,721.71 x
0.10 x 1/2
$100,000 x 0.12
x 1/2
$6,0 0.00 –
$5,386.09
Intermediate Accounting 11 Long-term Liabilities And Receivables
Issuing Bonds at a Premium
Jet Company records the second interest
payment on December 31,2004.
Effective Interest
Interest Expense 5,355.39
Premium on Bonds Payable 644.61
Cash 6,000.00
($107,721.71 – $613.91) x 0.10 x 1/2
$100,000 x 0.12 x 1/2$6,000,– $5,355.39
Intermediate Accounting 11 Long-term Liabilities And Receivables
Comparison of Book Values
Selling
Price
Premium
Face Value
Discount
Selling
Price
Issue Date Maturity Date
Straight-Line Method
Effective Interest Method
Effective Interest Method
Intermediate Accounting 11 Long-term Liabilities And Receivables
Bond Issue Costs
On January 1,2004 Bergen Company issues 10-year
bonds with a face value of $500,000 at 104,Expenditures
connected with the issue totaled $8,000.
Cash 512,000
Deferred Bond Issue Costs 8,000
Premium on Bonds Payable 20,000
Bonds Payable 500,000
0.04 x $500,000
$520,000 – $8,000
Intermediate Accounting 11 Long-term Liabilities And Receivables
Each year for the ten years
Deferred Bond Issue Costs is
amortized on a straight-line
basis by charging Bond
Interest Expense for $800.
Intermediate Accounting 11 Long-term Liabilities And Receivables
Bond Issue Costs
Accruing Bond Interest
McAdams Company issues $200,000 of 10%,5-year
bonds on October 1,2004 for $185,279.87,Interest on
these bonds is payable each October 1 and April 1.
Cash 185,279.87
Discount on Bonds Payable 14,720.13
Bonds Payable 200,000.00
Continued
Intermediate Accounting 11 Long-term Liabilities And Receivables
At the end of the fiscal year,December 31,2004,an
adjusting entry is required to record interest for three
months (assume straight-line amortization).
Interest Expense 5,736.01
Discount on Bonds Payable 736.01
Interest Payable 5,000.00
($14,720.13 ÷
5) x 3/12$200,000 x
0.10 x 3/12
Intermediate Accounting 11 Long-term Liabilities And Receivables
Accruing Bond Interest
At the end of the fiscal year,December 31,2004,an
adjusting entry is required to record interest for three
months (assume the effective-interest amortization).
Interest Expense 5,558.40
Discount on Bonds Payable 558.40
Interest Payable 5,000.00$185,279.87 x
0.12 x 3/12 $5,558.40 –
$5,000
Intermediate Accounting 11 Long-term Liabilities And Receivables
Accruing Bond Interest
3,Extinguishment of Liabilities
1) The debtor pays the creditor and is
relieved of its obligation for the liability,
2) The debtor is released legally from being
the primary obligor under the liability,
either judicially or by the creditor.
Under FASB Statement No,140,a liability is
considered extinguished for financial reporting
purposes if either of the following occurs:
Intermediate Accounting 11 Long-term Liabilities And Receivables
Bonds Retired Prior to Maturity
? over the remaining
life of the old issue,
? over the life of the
new bond issue,or
? in the current
period.
Conceptually,gains or losses
from refundings could be
recognized either--
Intermediate Accounting 11 Long-term Liabilities And Receivables
Whether bonds are recalled,
retired,or refunded prior to
maturity,any gain or loss is
reported as a component of
income from continuing
operations.
Intermediate Accounting 11 Long-term Liabilities And Receivables
Bonds Retired Prior to Maturity
Channing Corporation originally issued $100,000 of
12% bonds at 97 on January 1,1999,The bonds have
a 10-year life,pay interest on January 1 and July 1,and
are callable at 105 plus accrued interest,The company
amortizes the discount by the straight-line method.
Continued
On June 30,2004 the company recalls the bonds.
Intermediate Accounting 11 Long-term Liabilities And Receivables
Bonds Retired Prior to Maturity
Interest Expense 6,150
Discount on Bonds Payable 150
Interest Payable 6,000
First,Channing records the current interest expense
and liability,including the amortization of the discount
that expired since the last interest payment.
($3,000 ÷
10) x 1/2$100,000 x
0.12 x 1/2
Intermediate Accounting 11 Long-term Liabilities And Receivables
Bonds Retired Prior to Maturity
Bonds Payable 100,000
Interest Payable 6,000
Extraordinary Loss on Bond
Redemption 6,350
Discount on Bonds Payable 1,350
Cash 111,000
Channing then records the reacquisition of the
bonds at 105 plus accrued interest of $6,000.
Original discount $ 3,000
Less,Amortization
for 5 ? years (1,650 )
Unamortized discount $1,350
Intermediate Accounting 11 Long-term Liabilities And Receivables
Bonds Retired Prior to Maturity
4,Bonds With Equity
Characteristics
(1) the right to receive interest on the
bonds,and…
(2) the right to acquire common stock
and to participate in the potential
appreciation of the market value of
the company’s common stock.
By acquiring bonds with detachable stock warrants or
with a conversion feature,the bondholder has--
Intermediate Accounting 11 Long-term Liabilities And Receivables
Bartlett Corporation
Schedule of Cost of Goods
Manufactured
For the Year Ended December
31,2002
Convertible Bonds
Why issue
convertible
bonds?
Intermediate Accounting 11 Long-term Liabilities And Receivables
1) Avoid the downward price pressures on its
stock that placing a large new issue of
common stock on the market would cause.
2) Avoid the direct sale of common stock
when it believes its stock currently is
undervalued in the market.
3) Penetrate that segment of the capital
market that is unwilling or unable to
participate in a direct common stock issue.
4) Minimize the costs associated with selling
securities.
Intermediate Accounting 11 Long-term Liabilities And Receivables
Convertible Bonds
Intermediate Accounting 11 Long-term Liabilities And Receivables
Convertible Bonds
Shannon Corporation has outstanding
convertible bonds with a face value of
$10,000,Each $1,000 bond is convertible into
40 shares of common stock (par value $20 per
share),All bonds are converted into common
stock when the market value of Shannon’s
common stock is $26.50 per share.
Bonds Payable 10,000
Premium on Bonds Payable 500
Common Stock 8,000
Additional Paid-in Capital from
Bond Conversion 2,500
40 x 10 x
$20
$10,500 –
$8,000
Intermediate Accounting 11 Long-term Liabilities And Receivables
Convertible Bonds
Market Value Method
Market Value Method
Bonds Payable 10,000
Premium on Bonds Payable 500
Loss on Conversion 100
Common Stock 8,000
Additional Paid-in Capital from
Bond Conversion 2,600
40 x 10 x
$20
40 x 10 x $6.50
Intermediate Accounting 11 Long-term Liabilities And Receivables
Convertible Bonds
Notes Payable Issued for Cash
On January 1,2004,Johnson Company issues a 3-year,
non-interest-bearing note with a face value of $8,000
and receives $5,694.24 in exchange.
Cash 5,694.24
Discount on Notes Payable 2,305.76
Notes Payable 8,000.00
Contra account
to Notes Payable
Intermediate Accounting 11 Long-term Liabilities And Receivables
5,Long-term Notes Payable
On December 31,2004 Johnson Company
records the interest expense on the note.
Interest Expense 683.31
Discount on Notes Payable 683.31
Notes payable $8,000.00
Less,Unamortized discount (2,305.76 )
Carrying value at beginning of year $5,694.24
x Effective interest rate 0.12
Entry amount $ 683.31
Intermediate Accounting 11 Long-term Liabilities And Receivables
Notes Payable Issued for Cash
Notes Payable Exchanged for Cash and
Rights or Privileges
Verna Company borrows $100,000 by issuing a 3-
year,non-interest-bearing note to a customer,In
addition,Verna Company agrees to sell inventory to
the customer at a reduced price over a 5-year period,
The firm’s incremental borrowing rate is 12%.
Cash 100,000.00
Discount on Notes Payable 28,822.00
Notes Payable 100,000.00
Unearned Revenue 28,822.00
$100,000 – ($100,000 x 0.711780)
Intermediate Accounting 11 Long-term Liabilities And Receivables
$71,178 x 0.12
Interest Expense 8,541.36
Discount on Notes Payable 8,541.36
Unearned Revenue 5,764.40
Sales Revenue 5,764.40
End of First Year
$28,822 ÷ 5
Interest Expense 9,566.32
Discount on Notes Payable 9,566.32
Unearned Revenue 5,764.40
Sales Revenue 5,764.40
End of Second Year
($71,178 + $8,541.36) x 0.12
Intermediate Accounting 11 Long-term Liabilities And Receivables
Notes Payable Exchanged for Cash and
Rights or Privileges
Notes Payable Exchanged for
Property,Goods,or Services
1,No interest is stated,or
2,The stated rate of interest is clearly
unreasonable,or
3,The face value of the note is materially
different from the cash sales price of the
property,goods,or services,or the fair value
of the note at the date of the transaction.
APB Opinion No,21 states that the stipulated rate of
interest should be presumed fair,This presumption
can be overcome only if--
Intermediate Accounting 11 Long-term Liabilities And Receivables
6,Long-Term Notes Receivable
A note receivable is recorded at the
fair value of the property,goods,or
services or the fair value of the note,
whichever is more reliable.
Intermediate Accounting 11 Long-term Liabilities And Receivables
Long-Term Notes Receivable
On January 1,2004,Joyce Company accepted a
$10,000 non-interest-bearing,5-year note in exchange
for used equipment it sold to Marsden Company,
Notes Receivable 10,000.00
Accumulated Depreciation 3,000.00
Discount on Notes Receivable 4,325.73
Equipment 8,000.00
Gain on Sale of Equipment 674.27$10,000 – $5,674.27
(present value of equipment)
Intermediate Accounting 11 Long-term Liabilities And Receivables
Discount on Notes Receivable 680.91
Interest Revenue 680.91
December 31,2004
($10,000 – $4,325.73) x 0.12
Discount on Notes Receivable 762.62
Interest Revenue 762.62
December 31,2005
$10,000 – ($4,325.73 – $680.91) x 0.12
Intermediate Accounting 11 Long-term Liabilities And Receivables
Long-Term Notes Receivable
The End
Receivables
Accounting School ·Zhongnan
University of Economics & Law
ntermediate
Accounting
I
中级会计学
1,Reasons for Issuance of Long-
Term Liabilities
? Debt financing may be the only available
source of funds.
? Debt financing may have a lower cost.
? Debt financing offers an income tax
advantage.
? The voting privilege is not shared.
? Debt financing offers the opportunity for
leverage.
Intermediate Accounting 11 Long-term Liabilities And Receivables
Characteristics of Bonds ? Debenture bonds
? Mortgage bonds
? Registered bonds
? Coupon bonds
? Zero-coupon bonds
? Callable bonds
? Convertible bonds
? Serial bonds
Intermediate Accounting 11 Long-term Liabilities And Receivables
2,Bonds Payable
Steps a Company Must Follow When It
Issues Bonds
? It must receive approval from regulatory
authorities,such as the Securities and
Exchange Commission.
? The company must set the terms of the bond
issue,such as the contract rate and the maturity
date.
? It must make a public announcement of its
intent to sell the bonds on a particular date and
print the bond certificates.
Intermediate Accounting 11 Long-term Liabilities And Receivables
Recording the Issuance of Bonds
Company J sells bonds with a face value of $400,000
on the authorization date at 102.
Cash ($400,000 x 1.02) 408,000
Bonds Payable 400,000
Premium on Bonds Payable 8,000
Company M sells bonds with a face value of
$400,000 on the authorization date at 97.
Cash ($400,000 x,97) 388,000
Discount on Bonds Payable 12,000
Bonds Payable 400,000
A contra account—
subtracted from
Bonds Payable
Intermediate Accounting 11 Long-term Liabilities And Receivables
Recording the Issuance of Bonds
On March 1,2004,Grimes Corporation issues
$800,000 of 10-year bonds dated January 1,2004 at
par,The bonds have a contract (stated) interest rate of
12% and pay interest semiannually.
Cash 816,000
Interest Expense 16,000
Bonds Payable 800,000
$800,000 x 0.12 x 2/12Continued
Intermediate Accounting 11 Long-term Liabilities And Receivables
Recording the Issuance of Bonds
On July 1,2004,Grimes Corporation records the
semiannual interest payment.
Interest Expense 48,000
Cash 48,000
$800,000 x 0.12 x 6/12
Interest Expense
48,000 16,000
The balance of $32,000 represents the
interest cost since the bonds were
issued.
32,000
Intermediate Accounting 11 Long-term Liabilities And Receivables
Amortizing
Discounts and
Premiums
Intermediate Accounting 11 Long-term Liabilities And Receivables
Issuing Bonds at a Discount
Jet Company sells bonds for $92,976.39 on
January 1,2004,The bonds have a face value
of $100,000 and a 12% stated annual interest
rate,Interest is paid semiannually and the
bonds mature on December 31,2008.
Cash 92,976.39
Discount on Bonds Payable 7,023.61
Bonds Payable 100,000.00
Continued
Straight-Line Method
Intermediate Accounting 11 Long-term Liabilities And Receivables
Jet Company records the first interest
payment on June 30,2004.
Interest Expense 6,702.36
Discount on Bonds Payable 702.36
Cash 6,000.00
$6,000 + $702.36
Issuing Bonds at a Discount
$7,023.61 ÷ 10$100,000 x 0.12 x 1/2
Straight-Line Method
Intermediate Accounting 11 Long-term Liabilities And Receivables
After this second entry,the long-term liabilities
section of Jet’s December 31,2004 balance
sheet would appear as follows:
Bonds payable $100,000.00
Less,Discount on Bonds Payable (5,618.89 )
$ 94,381.11
$7,023.61 – $702.36 – $702.36
Issuing Bonds at a Discount
Straight-Line Method
Intermediate Accounting 11 Long-term Liabilities And Receivables
Issuing Bonds at a Premium
Jet Company sold bonds on January 1,2004 for
$107,721.71,Interest is paid semiannually.
Cash 107,721.71
Bonds Payable 100,000.00
Premium on Bonds Payable 7,721.71
Continued
Straight-Line Method
Intermediate Accounting 11 Long-term Liabilities And Receivables
Issuing Bonds at a Premium
The first interest payment is made on June 30.
Interest Expense 5,227.83
Premium on Bonds Payable 772.17
Cash ($100,0000 x 0.12 x 1/2) 6,000.00
Continued
Straight-Line Method
$7,721.71 ÷ 10
Intermediate Accounting 11 Long-term Liabilities And Receivables
Issuing Bonds at a Premium
After this second entry,the long-term
liabilities section of Jet’s December 31,2004
balance sheet would appear as follows:
Bonds payable $100,000.00
Add,Premium on Bonds Payable 6,177.37
$106,177.37
$7,721.71 – $772.17 – $772.17
Straight-Line Method
Intermediate Accounting 11 Long-term Liabilities And Receivables
Determining the Selling Price
Using the straight-line method,Interest
Expense is the same every year—which
is not realistic when a premium or
discount is involved,Instead,the
effective-interest method allows for a
stable interest rate per year.
Intermediate Accounting 11 Long-term Liabilities And Receivables
Determining the Selling Price
Jet Company desires to sell $100,000 of 5-year bonds
paying semiannual interest with a stated rate of 12%,
The current effective interest rate is 14%.
Present value of principal
($100,000 x 0.508349) $ 50,834.90
Present value of interest
($6,000 x 7.023582) 42,141.49
$ 92,976.39
Less face value (100,000.00)
Discount $ 7,023.61
Intermediate Accounting 11 Long-term Liabilities And Receivables
Determining the Selling Price
Jet Company desires to sell $100,000 of 5-year bonds
paying semiannual interest with a stated rate of 12%,
The bonds are sold to yield 14% interest.
Present value of principal
($100,000 x 0.613913) $ 61,391.30
Present value of interest
($6,000 x 7.721735) 46,330.41
$107,721.71
Less face value (100,000.00)
Premium $ 7,721.71
Intermediate Accounting 11 Long-term Liabilities And Receivables
Issuing Bonds at a Discount
Jet Company sells bonds for $92,976.39 on
January 1,2004,The bonds have a face value
of $100,000 and a 12% stated annual interest
rate,Interest is paid semiannually and the
bonds mature on December 31,2008.
Cash 92,976.39
Discount on Bonds Payable 7,023.61
Bonds Payable 100,000.00
Continued
Effective Interest
Intermediate Accounting 11 Long-term Liabilities And Receivables
Jet Company records the first interest
payment on June 30,2004.
Interest Expense 6,508.35
Discount on Bonds Payable 508.35
Cash 6,000.00
Issuing Bonds at a Discount
Effective Interest
$92,976.39 x 0.14 x 1/2
$6,508.35 – $6,000.00$100,000 x 0.12 x 1/2
Intermediate Accounting 11 Long-term Liabilities And Receivables
Jet Company records the second interest
payment on December 31,2004.
Interest Expense 6,543.93
Discount on Bonds Payable 543.93
Cash 6,000.00
Issuing Bonds at a Discount
Effective Interest
($92,976.39 + $508.35) x 0.14 x 1/2
$100,000 x 0.12 x 1/2
$6,43.93 – $6,000.00
Intermediate Accounting 11 Long-term Liabilities And Receivables
Issuing Bonds at a Premium
Jet Company sold bonds on January 1,2004 for
$107,721.71,Interest is paid semiannually.
Cash 107,721.71
Bonds Payable 100,000.00
Premium on Bonds Payable 7,721.71
Continued
Effective Interest
Intermediate Accounting 11 Long-term Liabilities And Receivables
Issuing Bonds at a Premium
The first interest payment is made on June 30.
Interest Expense 5,386.09
Premium on Bonds Payable 613.91
Cash 6,000.00
Continued
Effective Interest
$107,721.71 x
0.10 x 1/2
$100,000 x 0.12
x 1/2
$6,0 0.00 –
$5,386.09
Intermediate Accounting 11 Long-term Liabilities And Receivables
Issuing Bonds at a Premium
Jet Company records the second interest
payment on December 31,2004.
Effective Interest
Interest Expense 5,355.39
Premium on Bonds Payable 644.61
Cash 6,000.00
($107,721.71 – $613.91) x 0.10 x 1/2
$100,000 x 0.12 x 1/2$6,000,– $5,355.39
Intermediate Accounting 11 Long-term Liabilities And Receivables
Comparison of Book Values
Selling
Price
Premium
Face Value
Discount
Selling
Price
Issue Date Maturity Date
Straight-Line Method
Effective Interest Method
Effective Interest Method
Intermediate Accounting 11 Long-term Liabilities And Receivables
Bond Issue Costs
On January 1,2004 Bergen Company issues 10-year
bonds with a face value of $500,000 at 104,Expenditures
connected with the issue totaled $8,000.
Cash 512,000
Deferred Bond Issue Costs 8,000
Premium on Bonds Payable 20,000
Bonds Payable 500,000
0.04 x $500,000
$520,000 – $8,000
Intermediate Accounting 11 Long-term Liabilities And Receivables
Each year for the ten years
Deferred Bond Issue Costs is
amortized on a straight-line
basis by charging Bond
Interest Expense for $800.
Intermediate Accounting 11 Long-term Liabilities And Receivables
Bond Issue Costs
Accruing Bond Interest
McAdams Company issues $200,000 of 10%,5-year
bonds on October 1,2004 for $185,279.87,Interest on
these bonds is payable each October 1 and April 1.
Cash 185,279.87
Discount on Bonds Payable 14,720.13
Bonds Payable 200,000.00
Continued
Intermediate Accounting 11 Long-term Liabilities And Receivables
At the end of the fiscal year,December 31,2004,an
adjusting entry is required to record interest for three
months (assume straight-line amortization).
Interest Expense 5,736.01
Discount on Bonds Payable 736.01
Interest Payable 5,000.00
($14,720.13 ÷
5) x 3/12$200,000 x
0.10 x 3/12
Intermediate Accounting 11 Long-term Liabilities And Receivables
Accruing Bond Interest
At the end of the fiscal year,December 31,2004,an
adjusting entry is required to record interest for three
months (assume the effective-interest amortization).
Interest Expense 5,558.40
Discount on Bonds Payable 558.40
Interest Payable 5,000.00$185,279.87 x
0.12 x 3/12 $5,558.40 –
$5,000
Intermediate Accounting 11 Long-term Liabilities And Receivables
Accruing Bond Interest
3,Extinguishment of Liabilities
1) The debtor pays the creditor and is
relieved of its obligation for the liability,
2) The debtor is released legally from being
the primary obligor under the liability,
either judicially or by the creditor.
Under FASB Statement No,140,a liability is
considered extinguished for financial reporting
purposes if either of the following occurs:
Intermediate Accounting 11 Long-term Liabilities And Receivables
Bonds Retired Prior to Maturity
? over the remaining
life of the old issue,
? over the life of the
new bond issue,or
? in the current
period.
Conceptually,gains or losses
from refundings could be
recognized either--
Intermediate Accounting 11 Long-term Liabilities And Receivables
Whether bonds are recalled,
retired,or refunded prior to
maturity,any gain or loss is
reported as a component of
income from continuing
operations.
Intermediate Accounting 11 Long-term Liabilities And Receivables
Bonds Retired Prior to Maturity
Channing Corporation originally issued $100,000 of
12% bonds at 97 on January 1,1999,The bonds have
a 10-year life,pay interest on January 1 and July 1,and
are callable at 105 plus accrued interest,The company
amortizes the discount by the straight-line method.
Continued
On June 30,2004 the company recalls the bonds.
Intermediate Accounting 11 Long-term Liabilities And Receivables
Bonds Retired Prior to Maturity
Interest Expense 6,150
Discount on Bonds Payable 150
Interest Payable 6,000
First,Channing records the current interest expense
and liability,including the amortization of the discount
that expired since the last interest payment.
($3,000 ÷
10) x 1/2$100,000 x
0.12 x 1/2
Intermediate Accounting 11 Long-term Liabilities And Receivables
Bonds Retired Prior to Maturity
Bonds Payable 100,000
Interest Payable 6,000
Extraordinary Loss on Bond
Redemption 6,350
Discount on Bonds Payable 1,350
Cash 111,000
Channing then records the reacquisition of the
bonds at 105 plus accrued interest of $6,000.
Original discount $ 3,000
Less,Amortization
for 5 ? years (1,650 )
Unamortized discount $1,350
Intermediate Accounting 11 Long-term Liabilities And Receivables
Bonds Retired Prior to Maturity
4,Bonds With Equity
Characteristics
(1) the right to receive interest on the
bonds,and…
(2) the right to acquire common stock
and to participate in the potential
appreciation of the market value of
the company’s common stock.
By acquiring bonds with detachable stock warrants or
with a conversion feature,the bondholder has--
Intermediate Accounting 11 Long-term Liabilities And Receivables
Bartlett Corporation
Schedule of Cost of Goods
Manufactured
For the Year Ended December
31,2002
Convertible Bonds
Why issue
convertible
bonds?
Intermediate Accounting 11 Long-term Liabilities And Receivables
1) Avoid the downward price pressures on its
stock that placing a large new issue of
common stock on the market would cause.
2) Avoid the direct sale of common stock
when it believes its stock currently is
undervalued in the market.
3) Penetrate that segment of the capital
market that is unwilling or unable to
participate in a direct common stock issue.
4) Minimize the costs associated with selling
securities.
Intermediate Accounting 11 Long-term Liabilities And Receivables
Convertible Bonds
Intermediate Accounting 11 Long-term Liabilities And Receivables
Convertible Bonds
Shannon Corporation has outstanding
convertible bonds with a face value of
$10,000,Each $1,000 bond is convertible into
40 shares of common stock (par value $20 per
share),All bonds are converted into common
stock when the market value of Shannon’s
common stock is $26.50 per share.
Bonds Payable 10,000
Premium on Bonds Payable 500
Common Stock 8,000
Additional Paid-in Capital from
Bond Conversion 2,500
40 x 10 x
$20
$10,500 –
$8,000
Intermediate Accounting 11 Long-term Liabilities And Receivables
Convertible Bonds
Market Value Method
Market Value Method
Bonds Payable 10,000
Premium on Bonds Payable 500
Loss on Conversion 100
Common Stock 8,000
Additional Paid-in Capital from
Bond Conversion 2,600
40 x 10 x
$20
40 x 10 x $6.50
Intermediate Accounting 11 Long-term Liabilities And Receivables
Convertible Bonds
Notes Payable Issued for Cash
On January 1,2004,Johnson Company issues a 3-year,
non-interest-bearing note with a face value of $8,000
and receives $5,694.24 in exchange.
Cash 5,694.24
Discount on Notes Payable 2,305.76
Notes Payable 8,000.00
Contra account
to Notes Payable
Intermediate Accounting 11 Long-term Liabilities And Receivables
5,Long-term Notes Payable
On December 31,2004 Johnson Company
records the interest expense on the note.
Interest Expense 683.31
Discount on Notes Payable 683.31
Notes payable $8,000.00
Less,Unamortized discount (2,305.76 )
Carrying value at beginning of year $5,694.24
x Effective interest rate 0.12
Entry amount $ 683.31
Intermediate Accounting 11 Long-term Liabilities And Receivables
Notes Payable Issued for Cash
Notes Payable Exchanged for Cash and
Rights or Privileges
Verna Company borrows $100,000 by issuing a 3-
year,non-interest-bearing note to a customer,In
addition,Verna Company agrees to sell inventory to
the customer at a reduced price over a 5-year period,
The firm’s incremental borrowing rate is 12%.
Cash 100,000.00
Discount on Notes Payable 28,822.00
Notes Payable 100,000.00
Unearned Revenue 28,822.00
$100,000 – ($100,000 x 0.711780)
Intermediate Accounting 11 Long-term Liabilities And Receivables
$71,178 x 0.12
Interest Expense 8,541.36
Discount on Notes Payable 8,541.36
Unearned Revenue 5,764.40
Sales Revenue 5,764.40
End of First Year
$28,822 ÷ 5
Interest Expense 9,566.32
Discount on Notes Payable 9,566.32
Unearned Revenue 5,764.40
Sales Revenue 5,764.40
End of Second Year
($71,178 + $8,541.36) x 0.12
Intermediate Accounting 11 Long-term Liabilities And Receivables
Notes Payable Exchanged for Cash and
Rights or Privileges
Notes Payable Exchanged for
Property,Goods,or Services
1,No interest is stated,or
2,The stated rate of interest is clearly
unreasonable,or
3,The face value of the note is materially
different from the cash sales price of the
property,goods,or services,or the fair value
of the note at the date of the transaction.
APB Opinion No,21 states that the stipulated rate of
interest should be presumed fair,This presumption
can be overcome only if--
Intermediate Accounting 11 Long-term Liabilities And Receivables
6,Long-Term Notes Receivable
A note receivable is recorded at the
fair value of the property,goods,or
services or the fair value of the note,
whichever is more reliable.
Intermediate Accounting 11 Long-term Liabilities And Receivables
Long-Term Notes Receivable
On January 1,2004,Joyce Company accepted a
$10,000 non-interest-bearing,5-year note in exchange
for used equipment it sold to Marsden Company,
Notes Receivable 10,000.00
Accumulated Depreciation 3,000.00
Discount on Notes Receivable 4,325.73
Equipment 8,000.00
Gain on Sale of Equipment 674.27$10,000 – $5,674.27
(present value of equipment)
Intermediate Accounting 11 Long-term Liabilities And Receivables
Discount on Notes Receivable 680.91
Interest Revenue 680.91
December 31,2004
($10,000 – $4,325.73) x 0.12
Discount on Notes Receivable 762.62
Interest Revenue 762.62
December 31,2005
$10,000 – ($4,325.73 – $680.91) x 0.12
Intermediate Accounting 11 Long-term Liabilities And Receivables
Long-Term Notes Receivable
The End
