Chapter 14 NEW - Long-term Liabilities Chapter 14 Prepared...

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Accounting 124/Long-term Liabilities 1 Long-term Liabilities Chapter 14 Prepared by: Prof. Elizabeth K. Venuti
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Accounting 124/Long-term Liabilities 2 Long-term Debt Probable future sacrifices of economic benefits Arising from present obligations That are not payable within a year or the operating cycle, whichever is longer.
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Accounting 124/Long-term Liabilities 3 Issuing bonds The bond indenture agreement is the written specific promises made by the company to the bondholders. Bond indenture agreement details: Face amount Annual interest rate Interest payment dates (usually semi-annual) Special characteristics and features Secured or unsecured Term, serial, callable Convertible, commodity-backed, deep discount Registered or bearer Covenants and restrictions
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Accounting 124/Long-term Liabilities 4 Bond Cash Flows Bond Selling Price Bond Selling Price Bond Certificate Bond Certificate Interest Payments Interest Payments Face Value Payment at Face Value Payment at End of Bond Term End of Bond Term At Bond Issuance Date At Bond Issuance Date Company Company Issuing Issuing Bonds Bonds Subsequent Periods Subsequent Periods Investor Investor Buying Buying Bonds Bonds Company Company Issuing Issuing Bonds Bonds Investor Investor Buying Buying Bonds Bonds
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Accounting 124/Long-term Liabilities 5 Bond Certificates BOND PAYABLE BOND PAYABLE Face Value $1,000 Face Value $1,000 Interest 10% 6/30 & 12/31 6/30 & 12/31 Maturity Date 12/31/15 Maturity Date 12/31/15 Bond Date 1/1/06 Bond Date 1/1/06 1. 1. Face value (maturity or par value) Face value (maturity or par value) 2. Maturity Date 2. Maturity Date 3. 3. Stated Interest Rate Stated Interest Rate 4. 4. Interest Payment Dates Interest Payment Dates 5. Bond Date 5. Bond Date Other Factors: Other Factors: 6. Market Interest Rate 6. Market Interest Rate 7. Issue Date 7. Issue Date
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Accounting 124/Long-term Liabilities 6 Valuation of bonds payable (bond selling price) The price (or market value) of a bond is determined by supply and demand. The market value of a bond is equal to the present value of all cash flows related to the bond: The present value of interest payments (an ordinary annuity), plus, The present value of the maturity value (a single sum).
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Accounting 124/Long-term Liabilities 7 Valuation of bonds payable – common terminology Stated, coupon or nominal rate. Effective rate, yield or market value. Par, principal, face or maturity value. Market value, present value, issuance price
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Accounting 124/Long-term Liabilities 8 Interest rates and bond prices Market Interest Rate Bonds Sold At 10% Premium 12% Face Value Stated Interest Rate 12% 14% Discount
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Accounting 124/Long-term Liabilities 9 Bond valuation – bond issued at par On January 1, 2011, five-year bonds with a face value of $100,000 and a stated rate of 12% are issued at par. Interest is payable semi-annually.
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