14 - Chapter 14 Accounting for Long-term Liabilities 1...

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Chapter 14 Accounting for Long-term Liabilities 1
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Recommended problems from the text E14-2, 3, 5, 9, 11, 18, 19, 21 CPA exam questions 1, 2, 3, 4, 5, 6, 7, 9, 10 P14-4, 5, 8 2
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Definition of long-term liability Liabilities are classified as non —current or long- term if the are not payable within one year or one operating cycle, whichever is longer 3
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Examples of long-term liabilities Bonds payable Amortizing long- term debt Deferred tax liabilities (chapter 16) Capital leases obligations (chapter 15) 4
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Part 1: Bonds Payable Bonds are sold to investors The seller of the bonds wants cash The buyer of the bond wants a return on invested capital (interest expense) and the return of the cash 5
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Common types of Bonds Unsecured (most common. Bondholders get a regular “coupon interest” payments —generally every six months) Secured (some asset or assets is 6
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Unsecured coupon interest paying bonds Features Face value Coupon interest rate (used to determine the cash that must be paid each interest payment period) Number of periods (if payable semi- annually the book generally states this rate as an annual rate. you get the semi-annual 7
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Value of a Bond at issuance Liabilities related to bonds payable are recorded when the bonds are sold. The liability is equal to the amount for which the bond is sold, generally face value plus any 8
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Value of a Bond at issuance The value of a bond when it is sold is the bonds “present value” The bonds present value is equal to the future cash payments that will be made to bond 9
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Effective Interest Rate Present value is calculated as follows Present Value = Future Value / (1+i)n where, i = the effective interest rate that makes 10
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Determining Effective Interest Rate Single Future Payment You want to borrow $100 today You promise lenders that you will pay them $150 in two years What effective 100 = 150 / (1+i)^2 Solving for i: i = 22.47% i = the periodic interest rate that 11
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Determining Present Value, i.e., Discounting Multiple Future Payments You want to borrow cash today You promise lenders that you will pay them $25 interest in cash (these are like coupon payments) at the end of the Determining present values Year 1 →$25/1.2247 =$20.41 Year 2→$25/1.2247^2 =$16.67 Year 2→$100/1.2247^2=$66 .67 12
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You must have a calculator that can that you can use to perform present value calculations You must take time to understand how to perform present value calculations. Use the book that comes with the calculator. Most calculators 13
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Determining the present value of bonds: You need to know all but one of the factors below (the missing item can be calculated) Face value—this is the amount of cash bondholders will receive in the future when the bond “matures,” i.e., at the end of the bonds life ($100 in previous example)
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14 - Chapter 14 Accounting for Long-term Liabilities 1...

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