CHAPTER 14 Long-Term Liabilities

CHAPTER 14 Long-Term Liabilities - 14-1CHAPTER 14Long-Term...

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Unformatted text preview: 14-1CHAPTER 14Long-Term Liabilities14-2LECTURE OUTLINEThis chapter can be covered in three class sessions. Students are generally familiarwith the accounting for bonds payable from elementary accounting. Some studentsmay be unfamiliar with the effective interest method of amortization of bond discountand premium. This chapter provides an opportunity to apply present value conceptscovered in chapter 6. The appendix, Accounting for Troubled Debt, provides a detaileddiscussion of SFAS 114.A. Nature of Long-Term Liabilities.1.Consists of present obligations not payable within the operating cycle of thebusiness, or a year whichever is longer.2.Long-term creditors have no vote in management affairs and only receive astated rate of interest regardless of the level of earnings.3.Covenants or restrictions, for the protection of both lenders and borrowers, arestated in the bond indenture or note agreement.B. Bonds Payable. Arises from a contract known as a bond indenture. Represents apromise to pay the principle at maturity and periodic interest based on the statedinterest rate and the face value of the bond.1.Discuss the different types of bonds such as term bonds, serial bonds, securedand unsecured bonds, convertible bonds, commodity-backed bonds, deepdiscount bonds, registered, and coupon bonds.2.Valuation.The price of a bond is determined by the interaction between thebond’s stated interest rateand its market rate.a.A bond’s price is equal to the sum of the present value of the principle andthe present value of the periodic interest.14-3b.If the stated rate = the market rate, the bond will sell at par.c.If the stated rate < the market rate, the bond will sell at a discount.d.If the stated rate > the market rate, the bond will sell at a premium.TEACHING TIPIllustration 14-1can be used to demonstrate how bond prices are affected by thestated rate of interest and the market rate of interest. A numerical example is giventhat calculates the selling price of bonds issued at a premium, at par, and at adiscount.3.Accounting for the issuance of bonds.a.The face value of the bond is always reflected in the bond payableaccount.b.When a bond sells at a discount, the difference between the sales priceand the face value is debited to Discount on Bonds Payable.(1)This is a contra-account to Bonds Payable.c.When a bond sells at a premium, the difference between the sales priceand the face value is credited to Premium on Bonds Payable.(1)This is an adjunct account to Bonds Payable.d.Bonds sold between interest dates.(1)The price includes the interest accrued since the last interest payment.(2)The accrued interest is credited to Bond Intere st Expense.4.Amortization of bond discounts and premiums....
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CHAPTER 14 Long-Term Liabilities - 14-1CHAPTER 14Long-Term...

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