14 Ch0. 14 - Bonds and L-T Liabs.

14 Ch0. 14 - Bonds and L-T Liabs. - Click to edit Master...

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Unformatted text preview: Click to edit Master subtitle style Bonds & L-T Notes Chapter 14 1 1. Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt. 2. Account for bonds issued at par, at a discount, or at a premium, recording interest at the effective rate or by the straight-line method. 3. Describe the option to report liabilities at their fair values. 4. Characterize the accounting treatment of notes, including installment notes, issued for cash or for noncash consideration. 5. Record the early extinguishment of debt and the conversion of debt and warrants into equity securities. 6. Describe the accounting for a loan impairment and debt restructuring. 7. Present, analyze and evaluate disclosures for long-term debt in financial reports. Learning Objectives Bonds & L-T Notes 2 l Bond prices (values) move inversely with interest rates. l Bonds are actually sold at the prevailing interest rate.- Since the coupon is fixed, the bond price adjusts to match the bonds yield with the prevailing interest rate. l At the sale, the coupon can be lower, higher, or the same as the prevailing interest rate: Bonds Sold At Market Interest 6% 8% 10% Premium Market Rate (Yield) < Coupon Rate Face Value or Par Market Rate (Yield) = Coupon Rate Discount Market Rate (Yield) > Coupon Rate Coupon Rate of 8% Discounts occur because the Market Rate is MORE than the Coupon Rate and ALWAYS means MORE Interest Expense. Premiums occur because the Market Rate is LESS than the Coupon Rate and ALWAYS means LESS Interest Expense. Bonds Key Terms 3 Calculating the Selling Price of a Bond 1. Depends on Market Rate of interest 2. Computation of selling price:- PV of maturity value, plus- PV of interest payments- at what rate? Market rate of interest 3. Semi-annual interest paying bonds:- Require doubling the periods- Halving the interest rate Two Cash Flows for a Bond: 1. Principal Repayment = Lump Sum 2. Interest Payments = Annuity Price or Value: 1. PV $ for Principal Amount PLUS 2. PVA $ for Interest Payments Step 1: Calculate the Price (Value) of the Bond Step 2: Journalize the Issuance of the Bond Step 3: Journalize the Interest Expense and Semiannual Interest Payments or Accruals 1. Debit interest expense for the carrying value X the market rate or effective yield. 2. Credit cash for the coupon rate X the face value. If no cash is paid credit Interest Payable. 3. Debit Premiums on Bonds Payable or Credit Discounts on Bonds Payable to amortize the Premium or Discount. Step 4: Retire the Bond Bonds Accounting Basics 4 BE 14-2: A Company issued 5%, 20-year bonds with a face amount of $80 million. The market yield for bonds of similar risk and maturity is 6%. Interest is paid semiannually. At what price did the bonds sell?...
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This note was uploaded on 10/23/2009 for the course MGMT 401 taught by Professor Merlot during the Spring '09 term at Indiana Institute of Technology.

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14 Ch0. 14 - Bonds and L-T Liabs. - Click to edit Master...

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