Chapter 14 Lecture Notes with Answers

Chapter 14 Lecture Notes with Answers - Bonds Payable...

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Unformatted text preview: Bonds Payable Long-Term Notes Payable Reporting and Analysis of Long-Term Debt Issuing bonds Types and ratings Valuation Effective-interest method Costs of issuing Treasury bonds Extinguishment Notes issued at face value Notes not issued at face value Special situations Mortgage notes payable Off-balance-sheet financing Presentation and analysis Long-Term Liabilities 1. Describe the format procedures associated with issuing long-term debt. 2. Identify various types of bond issues. 3. Describe the accounting valuation for bonds at date of issuance. 4. Apply the methods of bond discount and premium amortization. Learning Objectives Chapter 14: Long Term Liabilities Chapter 14: Long Term Liabilities 1. Describe the accounting procedures for the extinguishment of debt. 2. Explain the accounting procedures for long-term notes payable. 3. Explain the reporting of off-balance sheet financing arrangements. 4. Indicate how long-term debt is presented and analyzed. Chapter 14: Long Term Liabilities Chapter 14: Long Term Liabilities LONG-TERM LIABILITIES Long-term liabilities are obligations that are expected to be paid after one year and are usually in the form of bonds or long-term notes. Bonds are a form of interest bearing notes payable issued by 1 corporations , 2 universities , and 3 governmental agencies . DETERMINING THE MARKET VALUE OF BONDS The market value ( present value ) of a bond is a function of three factors: 1 the dollar amounts to be received , 2 the length of time until the amounts are received , and 3 the market rate of interest . The market interest rate is the rate investors demand for loaning funds to the corporation. The process of finding the present value is referred to as discounting the future amounts. WHY ISSUE BONDS? Bonds, like common stock, are sold in small denominations (usually a thousand dollars), and as a result, they attract many investors. Bonds offer the following advantages over common stock: a. Stockholder control is not affected. b. Tax savings result. c. Earnings per share on common stock may be higher. The major disadvantages are: a. Interest must be paid on a periodic basis. b. The principal (face value) of the bonds must be paid at maturity. c. May reduced the ability to increase the debt if the need arisen. EFFECTS ON EARNINGS PER SHARE STOCKS VS. BONDS Microsystems, Inc. is considering two plans for financing the construction of a new $5 million plant : 1 Plan A involves the issuance of 200,000 shares of common stock at the current market price of $25 per share . 2 Plan B involves the issuance of $5 million, 12% bonds at face value. Microsystems currently has 100,000 shares of common stock outstanding. Income before interest and taxes will be $1.5 million on the new plant; income taxes are expected to be 30%. TYPES OF BONDS Secured and Unsecured Term and Serial Callable Convertible (Ch 16) Commodity-backed Deep Discount Registered and Bearer Bonds Income and Revenue TYPES OF BONDS...
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Chapter 14 Lecture Notes with Answers - Bonds Payable...

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