1. Accounting Principles, Ninth Edition
Chapter 15
Long-Term Liabilities
Accounting Principles, Ninth Edition

2. Study Objectives Explain why bonds are issued.
Prepare the entries for the issuance of bonds and interest expense.
Describe the entries when bonds are redeemed or converted.
Describe the accounting for long-term notes payable.
Contrast the accounting for operating and capital leases.
Identify the methods for the presentation and analysis of long-term liabilities.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)

3. Long-Term Liabilities
Bonds Basics
Bond Issues
Bond Retirements
Other Long-Term Liabilities
Statement Presentation and Analysis
Types of bonds
Issuing procedures
Trading
Market value
Issuing bonds at face value
Discount or premium
Issuing bonds at a discount
Issuing bonds at a premium
Redeeming bonds at maturity
Redeeming bonds before maturity
Converting bonds into common stock
Long-term notes payable
Lease liabilities
Presentation
Analysis
Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation.
Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt.
Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets.
Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees.
Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss:
difference between the actual return and the expected return on plan assets and,
amortization of the unrecognized net gain or loss from previous periods

4. Bond Basics Bonds are a form of interest-bearing notes payable.
Three advantages over common stock:
Stockholder control is not affected.
Tax savings result.
Earnings per share may be higher.
SO 1 Explain why bonds are issued.

5. Bond Basics Effects on earnings per share—stocks vs. bonds.
Illustration 15-2
SO 1 Explain why bonds are issued.

6. Bond Basics
Question
The major disadvantages resulting from the use of bonds are:
that interest is not tax deductible and the principal must be repaid.
that the principal is tax deductible and interest must be paid.
that neither interest nor principal is tax deductible.
that interest must be paid and principal repaid.
SO 1 Explain why bonds are issued.

7. Bond Basics Types of Bonds Secured and Unsecured (debenture) bonds.
Term and Serial bonds.
Registered and Bearer (or coupon) bonds.
Convertible and Callable bonds.
SO 1 Explain why bonds are issued.

8. Bond Basics Issuing Procedures
Bond contract known as a bond indenture.
Represents a promise to pay:
sum of money at designated maturity date, plus
periodic interest at a contractual (stated) rate on the maturity amount (face value).
Paper certificate, typically a $1,000 face value.
Interest payments usually made semiannually.
Generally issued when the amount of capital needed is too large for one lender to supply.
SO 1 Explain why bonds are issued.

9. Bond Basics Issuer of Bonds Maturity Date Contractual Interest Rate
Illustration 15-3
Maturity
Date
Contractual
Interest
Rate
Face or
Par Value
SO 1 Explain why bonds are issued.

10. Bond Basics Bond Trading
Bonds traded on national securities exchanges.
Newspapers and the financial press publish bond prices and trading activity daily.
Read as: Outstanding 5.125%, $1,000 bonds that mature in Currently yield a 5.747% return. On this day, $33,965,000 of these bonds were traded. Closing price was % of face value, or $
SO 1 Explain why bonds are issued.

11. Bond Basics Determining the Market Value of Bonds
Market value is a function of the three factors that determine present value:
the dollar amounts to be received,
the length of time until the amounts are received, and
the market rate of interest.
The features of a bond (callable, convertible, and so on) affect the market rate of the bond.
SO 1 Explain why bonds are issued.

12. Accounting for Bond Issues
Assume Contractual Rate of 8%
Market Interest
Bonds Sold At 6%
Premium 8%
Face Value
10%
Discount
SO 2 Prepare the entries for the issuance of bonds and interest expense.

13. Accounting for Bond Issues
Question
The rate of interest investors demand for loaning funds to a corporation is the:
contractual interest rate.
face value rate.
market interest rate.
stated interest rate.
SO 2 Prepare the entries for the issuance of bonds and interest expense.

14. Accounting for Bond Issues
Question
Karson Inc. issues 10-year bonds with a maturity value of $200,000. If the bonds are issued at a premium, this indicates that:
the contractual interest rate exceeds the market interest rate.
the market interest rate exceeds the contractual interest rate.
the contractual interest rate and the market interest rate are the same.
no relationship exists between the two rates.
SO 2 Prepare the entries for the issuance of bonds and interest expense.

15. Issuing Bonds at Face Value
Illustration: On January 1, 2010, Candlestick
Corporation issues $100,000, five-year, 10% bonds at 100 (100% of face value). The entry to record the sale is:
Jan. 1 Cash 100,000
Bonds payable 100,000
SO 2 Prepare the entries for the issuance of bonds and interest expense.

16. Issuing Bonds at Face Value
Illustration: On January 1, 2010, Candlestick
Corporation issues $100,000, five-year, 10% bonds at 100 (100% of face value). Assume that interest is
payable semiannually on January 1 and July 1. Prepare the entry to record the payment of interest on July 1, 2010, assume no previous accrual.
July 1 Bond interest expense 5,000
Cash 5,000
SO 2 Prepare the entries for the issuance of bonds and interest expense.

17. Issuing Bonds at Face Value
Illustration: On January 1, 2010, Candlestick
Corporation issues $100,000, five-year, 10% bonds at 100 (100% of face value). Assume that interest is
payable semiannually on January 1 and July 1. Prepare the entry to record the accrual of interest on December 31, 2010, assume no previous accrual.
Dec. 31 Bond interest expense 5,000
Bond interest payable 5,000
SO 2 Prepare the entries for the issuance of bonds and interest expense.

18. Issuing Bonds at a Discount
Illustration: On January 1, 2010, Candlestick, Inc. sells $100,000, five-year, 10% bonds for $92,639 (92.639% of face value). Interest is payable on July 1 and January 1. The entry to record the issuance is:
Jan. 1 Cash 92,639
Discount on bonds payable 7,361
Bond payable 100,000
SO 2 Prepare the entries for the issuance of bonds and interest expense.

19. Issuing Bonds at a Discount
Statement Presentation
Illustration 15-6
SO 2 Prepare the entries for the issuance of bonds and interest expense.

20. Issuing Bonds at a Discount
Total Cost of Borrowing
Illustration 15-7
Illustration 15-8
SO 2 Prepare the entries for the issuance of bonds and interest expense.

21. Issuing Bonds at a Discount
Question
Discount on Bonds Payable:
has a credit balance.
is a contra account.
is added to bonds payable on the balance sheet.
increases over the term of the bonds.
SO 2 Prepare the entries for the issuance of bonds and interest expense.

22. Issuing Bonds at a Premium
Illustration: On January 1, 2010, Candlestick, Inc. sells $100,000, five-year, 10% bonds for $108,111 ( % of face value). Interest is payable on July 1 and January 1. The entry to record the issuance is:
Jan. 1 Cash 108,111
Bonds payable 100,000
Premium on bond payable 8,111
SO 2 Prepare the entries for the issuance of bonds and interest expense.

23. Issuing Bonds at a Premium
Statement Presentation
Illustration 15-9
Issuing bonds at an amount different from face value is quite common. By the time a company prints the bond certificates and markets the bonds, it will be a coincidence if the market rate and the contractual rate are the same.
SO 2 Prepare the entries for the issuance of bonds and interest expense.

24. Issuing Bonds at a Premium
Total Cost of Borrowing
Illustration 15-10
Illustration 15-11
SO 2 Prepare the entries for the issuance of bonds and interest expense.