Chapter 14

LONG-TERM LIABILITIES

NỢ DÀI HẠN

© 2009 The McGraw-Hill Companies, Inc.,

All Rights Reserved
 BOND FINANCING
HUY ĐỘNG VỐN BẰNG PHÁT HÀNH TRÁI PHIẾU

Advantages Disadvantages
Bonds do not affect Requires payment of
stockholder control. both periodic interest
and par value at
maturity.
Interest on bonds is tax
deductible. Can decrease return on
equity when the
company pays more in
Bonds can increase interest than it earns on
return on equity. the borrowed funds.

McGraw-Hill/Irwin Slide 2
 BOND ISSUING PROCEDURES
QUY TRÌNH PHÁT HÀNH TRÁI PHIẾU

. . .an investment firm

A company sells the called an underwriter.
bonds to. . . The underwriter sells
the bonds to. . .

A trustee
monitors
the bond
. . . investors issue.
McGraw-Hill/Irwin Slide 3
 BASICS OF BONDS

Corporation Investors
Bond Selling Price

Bond Certificate
at Par Value

McGraw-Hill/Irwin Slide 4
 BASICS OF BONDS

Bond Interest Payments

Corporation Investors
Bond Interest Payments

Bond Issue Interest Payment =

Date Bond Par Value × Stated Interest Rate
McGraw-Hill/Irwin Slide 5
 ISSUING BONDS AT PAR
PHÁT HÀNH TRÁI PHIẾU BẰNG MỆNH GIÁ

A company is authorized to issue the following bonds on

January 1, 2009:
Par Value = $800,000
Stated Interest Rate = 9%
Interest Dates = 6/30 and 12/31
Bond Date = Jan. 1, 2009
Maturity Date = Dec. 31, 2028 (20 years)

DR CR
Jan 1 Cash 800,000
Bonds Payable 800,000
Sold bonds at par.

McGraw-Hill/Irwin Slide 6
 ISSUING BONDS AT PAR

On June 30, 2009, to record the first semiannual interest

payment is . . .

DR CR
Jun 30 Bond Interest Expense 36,000
Cash 36,000
Paid semiannual interest on bonds

$800,000 × 9% × ½ year = $36,000

This entry is made every six months until the
bonds mature.

McGraw-Hill/Irwin Slide 7
 BOND DISCOUNT OR PREMIUM
TRÁI PHIẾU CHIẾT KHẤU HOẶC TRÁI PHIẾU CÓ PHỤ TRỘI

Bond Sets Market Sets

Contract Market
Contract rate > Market rate Bonds sell at Premium
Rate Rate

Contract rate = Market rate Bonds sell at Par

Contract rate < Market rate Bonds sell at Discount

McGraw-Hill/Irwin Slide 8
 ISSUING BONDS AT A DISCOUNT

Fila announces an offer to issue bonds with the

following provisions:
Par Value = $100,000
Issue Price = 96.454% of par value
Stated Interest Rate = 8%
Market Interest Rate = 10% }
Bond will sell at a discount.

Interest Dates = 6/30 and 12/31

Bond Date = Jan. 1, 2009
Maturity Date = Dec. 31, 2010 (2 years)

McGraw-Hill/Irwin Slide 9
 ISSUING BONDS AT A DISCOUNT

On Jan. 1, 2009, Fila will record the bond issue as:

Par value $ 100,000  
Cash proceeds 96,454 *
Discount $ 3,546  
*$100,000 x 96.454%  

DR CR
Jan 1 Cash 96,454
Discount on Bonds Payable 3,546
Bonds Payable 100,000
Sold bonds at a discount on issue date

Contra-Liability
Account
McGraw-Hill/Irwin Slide 10
 ISSUING BONDS AT A DISCOUNT
Partial Balance Sheet as of Jan. 1, 2009
Long-term Liabilities:
Bonds Payable 100,000
Less: Discount on Bonds Payable 3,546 96,454

Maturity Value
Carrying Value

Amortizing a Bond Discount

Using the straight-line method, the discount amortization will
be $887(rounded) every six months.
$3,546 ÷ 4 periods = $887(rounded)
McGraw-Hill/Irwin Slide 11
 AMORTIZING A BOND DISCOUNT
Fila will make the following entry every six
months to record the cash interest payment and
the amortization of the discount.
DR CR
Jun 30 Bond Interest Expense 4,887
Discount on Bonds Payable 887
Cash 4,000
To record interest payment and amortization

$3,546 ÷ 4 periods = $887 (rounded)

$100,000 × 8% × ½ = $4,000

McGraw-Hill/Irwin Slide 12
 AMORTIZING A BOND DISCOUNT
Straight-Line Amortization Table
Interest Interest Discount Unamortized Carrying
Date Payment Expense Amortization* Discount Value
1/1/2009 $ 3,546 $ 96,454
6/30/2009 $ 4,000 $ 4,887 $ 887 2,659 97,341
12/31/2009 4,000 4,887 887 1,772 98,228
6/30/2010 4,000 4,887 887 885 99,115
12/31/2010 4,000 4,885 885 - 100,000
$ 16,000 $ 19,546 $ 3,546
* Rounded.

McGraw-Hill/Irwin Slide 13
 ISSUING BONDS AT A PREMIUM

Adidas issues bonds with the following features on

January 1, 2009:
Par Value = $100,000
Issue Price = 103.546% of par value
}
Stated Interest Rate = 12% Bond will sell at a premium.
Market Interest Rate = 10%
Interest Dates = 6/30 and 12/31
Bond Date = Jan. 1, 2009
Maturity Date = Dec. 31, 2010 (2 years)

McGraw-Hill/Irwin Slide 14
 ISSUING BONDS AT A PREMIUM
On Jan. 1, 2009, Adidas will record the bond issue as:

Par value $ 100,000  

Cash proceeds 103,546 *
Premium $ 3,546  
*$100,000 x 103.546%  

DR CR
Jan 1 Cash 103,546
Premium on Bonds Payable 3,546
Bonds Payable 100,000
Sold bonds at a premium on issue date

Adjunct-Liability
Account
McGraw-Hill/Irwin Slide 15
 ISSUING BONDS AT A PREMIUM
Partial Balance Sheet as of Jan. 1, 2009
Long-term Liabilities:
Bonds Payable 100,000
Plus: Premum on Bonds Payable 3,546 103,546

Maturity Value
Carrying Value

Amortizing a Bond Premium

Using the straight-line method, the premium amortization will
be $887(rounded) every six months.
$3,546 ÷ 4 periods = $887(rounded)
McGraw-Hill/Irwin Slide 16
 AMORTIZING A BOND PREMIUM
Adidas will make the following entry every six
months to record the cash interest payment and
the amortization of the discount.
DR CR
Jun 30 Bond Interest Expense 5,113
Premium on Bonds Payable 887
Cash 6,000
To record interest payment and amortization

$3,546 ÷ 4 periods = $887 (rounded)

$100,000 × 12% × ½ = $6,000

McGraw-Hill/Irwin Slide 17
 AMORTIZING A BOND PREMIUM
Straight-Line Amortization Table
Interest Interest Premium Unamortized Carrying
Date Payment Expense Amortization* Premium Value
1/1/2009 $ 3,546 $ 103,546
6/30/2009 $ 6,000 $ 5,113 $ 887 2,659 102,659
12/31/2009 6,000 5,113 887 1,772 101,772
6/30/2010 6,000 5,113 887 885 100,885
12/31/2010 6,000 5,115 885 - 100,000
$ 24,000 $ 20,454 $ 3,546
* Rounded.

McGraw-Hill/Irwin Slide 18
 PRESENT VALUE OF A DISCOUNT BOND

Here are the Fila bonds we worked with earlier:

Par Value = $100,000
Issue Price = ?
Stated Interest Rate = 8%
Market Interest Rate = 10%
Interest Dates = 6/30 and 12/31
Bond Date = Jan. 1, 2009
Maturity Date = Dec. 31, 2010 (2 years)

McGraw-Hill/Irwin Slide 19
 PRESENT VALUE OF A DISCOUNT
BOND
Table Present
Cash Flow Table Value Amount Value
Par value of the bond PV of $1 (B.1) 0.8227 $ 100,000 $ 82,270

Interest (annuity) PV of Annuity

of $1 (B.3) 3.5460 4,000 14,184
Price of bond $ 96,454

1. Semiannual rate = 5% (Market rate 10% ÷ 2)

2. Semiannual periods = 4 (Bond life 2 years × 2)

$100,000 × 8% × ½ = $4,000

McGraw-Hill/Irwin Slide 20
 BOND RETIREMENT
THU HỒI TRÁI PHIẾU

At Maturity – Khi đáo hạn

Let’s retire the Fila bonds at maturity for
$100,000 cash.

DR CR
Dec 31 Bonds Payable 100,000
Cash 100,000
Retirement of bonds at maturity

Because any discount or premium will be fully amortized at

maturity, the carrying value of the bonds will be equal to
par value.

McGraw-Hill/Irwin Slide 21
 BOND RETIREMENT

Before Maturity – trước khi đáo hạn

• Carrying Value > Retirement Price = Gain
• Carrying Value < Retirement Price = Loss
Let’s retire the Adidas bonds on June 30, 2009, after the first
interest payment. The bond carrying value is $102,659, and
the unamortized bond premium is $2,659. Because the
bonds are retired early, a call premium of $3,000 must be
paid to the bondholders.
DR CR
Jun 30 Bonds Payable 100,000
Premium on Bonds Payable 2,659
Loss on Bond Retirement 341
Cash 103,000
To record bond retirement before maturity
McGraw-Hill/Irwin Slide 22
 BOND RETIREMENT
By Conversion – bằng cách chuyển đổi
On January 1, $100,000 par value bonds of Converse, with a
carrying value of $100,000, are converted to 15,000 shares
of $2 par value common stock.
DR CR
Jan 1 Bonds Payable 100,000
Common Stock 30,000
Paid-in Capital in Excess of Par 70,000
To record conversion of bonds into common stock

15,000 shares × $2 par value per share

McGraw-Hill/Irwin Slide 23
 LONG-TERM NOTES PAYABLE

Cash

Company Note Payable Lender

When is the repayment of the principal

and interest going to be made?

Note Date Note Maturity

Date
McGraw-Hill/Irwin Slide 24
 LONG-TERM NOTES PAYABLE

Single Payment of
Principal plus Interest

Company Lender
Single Payment of
Principal plus
Interest

Note Date Note Maturity

Date
McGraw-Hill/Irwin Slide 25
 LONG-TERM NOTES PAYABLE

Regular Payments of
Principal plus Interest

Company Lender
Regular Payments of Principal plus Interest

Payments can either be equal

Note Date principal payments plus interest Note Maturity
or equal payments. Date
McGraw-Hill/Irwin Slide 26
 INSTALLMENT NOTES WITH EQUAL
PAYMENTS
On January 1, 2009, Foghog borrows $60,000 from a bank to
purchase equipment. It signs an 8% installment note requiring 6
annual payments of principal plus interest.

DR CR
Jan 1 Cash 60,000
Notes Payable 60,000
Borrowed $60,000 b y signing an 8% note

Compute the periodic payment by dividing the face amount

of the note by the present value factor.
Table Present
Computation Table
PV of Value Value Payment
Principal divided Annuity of
by PV factor $1 (B.3) 4.6229 60,000 12,979
McGraw-Hill/Irwin Slide 27
 INSTALLMENT NOTES WITH EQUAL
PAYMENTS
Amortization Schedule
(A = 8% * D) (B = C - A) C (D = Previous -B)
Interest Note Note
Date Expense Amortization* Payment Balance
Beginning Balance $ 60,000
12/31/2009 $ 4,800 $ 8,179 $ 12,979 51,821
12/31/2010 4,146 8,833 12,979 42,988
12/31/2011 3,439 9,540 12,979 33,448
12/31/2012 2,676 10,303 12,979 23,145
12/13/2013 1,852 11,127 12,979 12,017
12/31/2014 961 12,017 12,979 0
$ 17,873 $ 60,000 $ 77,874
* Rounded.

McGraw-Hill/Irwin Slide 28
 INSTALLMENT NOTES WITH EQUAL
PAYMENTS
Let’s record the first payment made on December 31, 2009
by Foghog to the bank.

DR CR
Dec 31 Notes Payable 8,179
Interest Expense 4,800
Cash 12,979
To record payment on note payab le

Refer back to the amortization schedule and see if you can

make the entry for the second payment on the note.

DR CR
Dec 31 Notes Payable 8,833
Interest Expense 4,146
Cash 12,979
To record payment on note payable
McGraw-Hill/Irwin Slide 29
 MORTGAGE NOTES AND
BONDS

A legal agreement that helps protect the lender if

the borrower fails to make the required payments.
Gives the lender the right to be paid out of the
cash proceeds from the sale of the borrower’s
assets specifically identified in the mortgage
contract.

McGraw-Hill/Irwin Slide 30
 14A – PRESENT VALUES OF BONDS
AND NOTES
Present Value of $1
  Rate
Periods 3% 4% 5% Let’s calculate the present value of a
1 0.9709 0.9615 0.9524 debt instrument that has a face amount
2 0.9426 0.9246 0.9070
3 0.9151 0.8890 0.8638
of $100,000, contract rate of 8%, market
4 0.8885 0.8548 0.8227 rate of 10% with interest paid
5 0.8626 0.8219 0.7835 semiannually. First, we calculate the
6 0.8375 0.7903 0.7462 present value of the principal repayment
7 0.8131 0.7599 0.7107
8 0.7894 0.7307 0.6768
in 4 periods (2 years × 2 payments per
9 0.7664 0.7026 0.6446 year, using 5% market rate (10% annual
10 0.7441 0.6756 0.6139 rate ÷ 2 payments per year).

$100,000 × 0.8227 = $82,270

McGraw-Hill/Irwin Slide 31
 14A – PRESENT VALUES OF BONDS
AND NOTES
Present Value of Annuity of $1
  Rate
Periods 3% 4% 5%
1 0.9709 0.9615 0.9524
Interest Annuity 2 1.9135 1.8861 1.8594
3 2.8286 2.7751 2.7232
$100,000 × 8% × ½ = $4,000 4 3.7171 3.6299 3.5460
5 4.5797 4.4518 4.3295
6 5.4172 5.2421 5.0757
7 6.2303 6.0021 5.7864
$4,000 × 3.5460 = $14,184 8
9
7.0197
7.7861
6.7327
7.4353
6.4632
7.1078
10 8.5302 8.1109 7.7217

      Present
  Amount PV Factor Value
Principal $ 100,000 0.8227 $ 82,270
Interest 8,000 3.5460 14,184
Issue price of debt   $ 96,454
       
McGraw-Hill/Irwin Slide 32
 14B – EFFECTIVE INTEREST
AMORTIZATION
Effective Interest Amortization Schedule
Interest Interest Discount Unamortized Carrying
Date Payment Expense Amortization* Discount Value
1/1/2009 $ 3,546 $ 96,454
6/30/2009 $ 4,000 $ 4,823 $ 823 2,723 97,277
12/31/2009 4,000 4,864 864 1,859 98,141
6/30/2010 4,000 4,907 907 952 99,048
12/31/2010 4,000 4,952 952 0 100,000
$ 16,000 $ 19,546 $ 3,546
* Rounded.

$96,454 × 5% = $4,823 $100,000 - $2,723 = $97,277

McGraw-Hill/Irwin Slide 33
 14C - ISSUING BONDS BETWEEN
INTEREST DATES
Avia sells $100,000 of its 9% bonds at par on March 1, 2009, 60
days after the stated issue date. The interest on Avia bonds is
payable semiannual on each June 30 and December 31.
Stated Issue First Interest
date 1/1 Date of sale 3/1 date 6/30
$1,500 accrued $3,000 earned
Bondholder pays Issuer pays $4,500 to
$1,500 to issuer bondholder
DR CR
Mar 1 Cash 101,500
Interest Payable 1,500
Bonds Payable 100,000
To record sale of bonds on 3/1
DR CR
Jun 30 Bond Interest Expense 3,000
Interest Payable 1,500
Cash 4,500
McGraw-Hill/Irwin To record first interest payment Slide 34
 14D – LEASES – THUÊ TÀI SẢN

A lease is a contractual agreement between the lessor (asset owner)

and the lessee (asset renter or tenant) that grants the lessee the right to
use the asset for a period of time in return for cash (rent) payments.

Operating Leases – THUÊ HoẠT ĐỘNG

Operating leases are short-term (or cancelable) leases in which the lessor retains the risks
and rewards of ownership. Examples include most car and apartment rental agreements.

Capital Leases – THUÊ TÀI CHÍNH

Capital leases are long-term (or non-cancelable) leases by which the lessor transfers
substantially all risks and rewards of ownership to the lessee. Examples include leases of
airplanes and department store buildings.

McGraw-Hill/Irwin Slide 35
 END OF CHAPTER 14

McGraw-Hill/Irwin Slide 36