Financial Accounting LongTerm Liabilities Chapter 9 Spiceland Thomas
Financial Accounting Long-Term Liabilities Chapter 9 Spiceland | Thomas | Herrmann Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
9 -2 Learning Objectives • • Explain financing alternatives Identify the characteristics of bonds Determine the price of a bond issue Account for the issuance of bonds Record the retirement of bonds Identify other major long-term liabilities Make financial decisions using long-term liability ratios Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
9 -3 Part A Overview of Long-Term Debt Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
9 -4 Learning Objective 1 Explain financing alternatives Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
9 -5 Financing Alternatives • Capital structure: mixture of liabilities and stockholders’ equity a business uses • Debt financing: borrowing money • Equity financing: obtaining additional investment from stockholders Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
9 -6 Learning Objective 2 Identify the characteristics of bonds Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
9 -7 What Are Bonds? • Formal debt instrument • Usually issued to many lenders • Borrower repays the principal or face amount, at a specified maturity date • Pay interest over the life of the bond • Private placement: selling debt securities directly to a single investor Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
9 -8 Characteristics of Bonds • • • Secured bonds Unsecured bonds Term bonds Serial bonds Callable bonds Convertible bonds Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Illustration 9. 1—Summary of Bond Characteristics Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 9 -9
Illustration 9. 2—Timeline of a Bond Issue Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 9 -10
9 -11 Part B Pricing a Bond Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
9 -12 Learning Objective 3 Determine the price of a bond issue Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
9 -13 Illustration 9. 3—Pricing Bonds Issued at Face Amount Using a Financial Calculator Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Illustration 9. 4—Pricing Bonds Issued at Face Amount Using Excel Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 9 -14
9 -15 Illustration 9. 5—Pricing Bonds Issued at Face Amount Using Present Value Tables Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Illustration 9. 6—Pricing Bonds Issued at a Discount Using a Financial Calculator Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 9 -16
Illustration 9. 9—Pricing Bonds Issued at a Premium Using a Financial Calculator Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 9 -17
Illustration 9. 12—Stated Rate, Market Rate, and the Bond Issue Price Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 9 -18
9 -19 Part C Recording Bonds Payable Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
9 -20 Learning Objective 4 Account for the issuance of bonds Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Recording Bonds Payable—Issued at Face Value • Bonds issue for exactly $100, 000, assuming a 7% market interest rate • First semiannual interest payment: Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 9 -21
Recording Bonds Payable—Issued at Discount Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 9 -22
Illustration 9. 13—Amortization Schedule for Bonds Issued at a Discount Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 9 -23
Recording Bonds Payable—Issued at Premium Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 9 -24
Illustration 9. 14—Amortization Schedule for Bonds Issued at a Premium Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 9 -25
Illustration 9. 15—Changes in Carrying Value over Time Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 9 -26
9 -27 Learning Objective 5 Record the retirement of bonds Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Recording Bond Retirements— At Maturity • Retired: buy back of bonds from the investors Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 9 -28
Recording Bond Retirements— Before Maturity • Early extinguishment of debt: retirement of debt before its scheduled maturity Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 9 -29
9 -30 Part D Other Long-Term Liabilities Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
9 -31 Learning Objective 6 Identify other major long-term liabilities Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
9 -32 Installment Notes • Requires installment payments • Installment payment: payment includes interest and outstanding balance Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Illustration 9. 16—Amortization Schedule for an Installment Note Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 9 -33
Recording Installment Payments of Note • For first two months Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 9 -34
9 -35 Leases • Contractual arrangement between lessor (owner) and lessee (user) to provide the right to use an asset for a specified period of time • Types: • Operating leases: lessor owns the asset, and the lessee simply uses the asset temporarily • Capital leases: lessee buys an asset and borrows the money through a lease to pay for the asset Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
9 -36 Learning Objective 7 Make financial decisions using long-term liability ratios Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
9 -37 Debt Analysis • • Business decisions include risk Failure to properly consider risk could prove costly Long-term debt management is crucial Measuring a company’s risk: • Debt to equity ratio • Times interest earned ratio Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
9 -38 Debt to Equity Ratio • Measure of financial leverage Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
9 -39 Times Interest Earned Ratio • Compares interest expense with income available to pay those charges Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
9 -40 End of Chapter 9 Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
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