Chapter 14 - Long-term Liabilities Bonds and Notes

7/24/2019 Chapter 14 - Long-term Liabilities Bonds and Notes

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Long-Term

Long-Term

Liabilities:

Liabilities:

Bondsand

Bondsand

NotesNote

sChapter14

Chapter14


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N

LearningLearningObjectiveObjectiveComputeth

epotentialimpactof

Computethepotentialimpactof

long-termborroingonearnings

long-termborroingonearningspershare!

pershare!

11


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"""""""" Corporations"""""""" Corporations

o Corporations #nance their """""""" usingCorporations #nance their """""""" usingthe folloing sources:the folloing sources:

$hort-term """""""" % such as """""""" """"""""$hort-term """""""" % such as """""""" """"""""

or """""""" on """""""" !or """""""" on """""""" ! Long-term """""""" % such as """""""" """"""""Long-term """""""" % such as """""""" """"""""

or """""""" """""""" !or """""""" """""""" !

&'uit(% such as """""""" """""""" or """"""""&'uit(% such as """""""" """""""" or """"""""

"""""""" !"""""""" !


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)inancing Corporations)inancing Corporations

o * """""""" is a form of an """""""" -* """""""" is a form of an """""""" -"""""""" note! Li+e a note% a """""""""""""""" note! Li+e a note% a """"""""

re'uires periodic """""""" pa(ments% andre'uires periodic """""""" pa(ments% and

the """""""" amount must be repaid at thethe """""""" amount must be repaid at the"""""""" date!"""""""" date!


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,uc+adee Corporation is considering the,uc+adee Corporation is considering thefolloing plans to issue debt and e'uit(:folloing plans to issue debt and e'uit(:


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o n deciding among #nancing plans% then deciding among #nancing plans% thee.ect on """""""" per """""""" is oftene.ect on """""""" per """""""" is often

considered!considered!

o"""" """ """""/&0$ measures the """""""""""" """ """""/&0$ measures the """"""""earned b( each """""""" of common stoc+!earned b( each """""""" of common stoc+!

t is computed as follos:t is computed as follos:

Earnings per Share =


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LearningLearningObjectiveObjective2escribethecharacteristicsand

2escribethecharacteristicsand

terminolog(ofbondspa(able!

terminolog(ofbondspa(able!

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Bond Characteristics and Terminolog(Bond Characteristics and Terminolog(

oThe underl(ing contract beteen theThe underl(ing contract beteen thecompan( """""""" bonds and thecompan( """""""" bonds and the

bondholders is called a """"""""bondholders is called a """""""""""""""" !"""""""" !


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o 4suall(% the """""""" """""""" of each4suall(% the """""""" """""""" of eachbond% called the principal% is 51%666% or abond% called the principal% is 51%666% or a

"""""""" of 5 """"""""! nterest on bonds"""""""" of 5 """"""""! nterest on bonds

ma( be pa(able """""""" % """""""" % orma( be pa(able """""""" % """""""" % or

"""""""" ! 7ost pa( interest """""""" !"""""""" ! 7ost pa( interest """""""" !


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o 8hen all bonds of an issue mature at the8hen all bonds of an issue mature at thesame time% the( are called """"""""same time% the( are called """"""""

""""""""!""""""""!

o f the( mature over several dates% the( aref the( mature over several dates% the( arecalled """""""" """"""""!called """""""" """"""""!

o Bonds that ma( be e9changed for otherBonds that ma( be e9changed for other

"""""""" are called """""""" """"""""!"""""""" are called """""""" """"""""!


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o Bonds that a corporation """""""" theBonds that a corporation """""""" the"""""""" to redeem """""""" their maturit("""""""" to redeem """""""" their maturit(

are called callable """"""""!are called callable """"""""!

o Bonds issued on the basis of the generalBonds issued on the basis of the generalcredit of the corporation are called """""""credit of the corporation are called """""""

""""""""!""""""""!


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0roceeds from ssuing Bonds0roceeds from ssuing Bonds

o 8hen a corporation issues bonds% the8hen a corporation issues bonds% theproceeds """""""" for the bonds dependproceeds """""""" for the bonds depend

on:on:

The """""""" amount of the bonds% hich is theThe """""""" amount of the bonds% hich is theamount """""""" at the """""""" date!amount """""""" at the """""""" date!

The """""""" rate on the bonds!The """""""" rate on the bonds!

The """""""" rate of interest for """""""" bonds!The """""""" rate of interest for """""""" bonds!


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oThe """""""" amount and the interestThe """""""" amount and the interest"""""""" on the bonds are identi#ed in the"""""""" on the bonds are identi#ed in the

bond """""""" !bond """""""" !

oThe """""""" """""""" to be paid on theThe """""""" """""""" to be paid on the"""""""" """""""" of the bond is called the"""""""" """""""" of the bond is called the

contract rate or """""""" """"""""!contract rate or """""""" """"""""!


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oThe """""""" """""""" of interest% orThe """""""" """""""" of interest% or"""""""" """""""" of interest% is determined"""""""" """""""" of interest% is determined

b( transactions beteen """""""" andb( transactions beteen """""""" and

"""""""" of similar bonds!"""""""" of similar bonds!

oThe mar+et rate of interest is a.ected b( aThe mar+et rate of interest is a.ected b( a

variet( of factors% including investorsvariet( of factors% including investors

e9pectations of """""""" and """"""""e9pectations of """""""" and """"""""

"""""""" conditions!"""""""" conditions!


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o $ummar($ummar( f the mar+et rate e'uals the """""""" """""""" %f the mar+et rate e'uals the """""""" """""""" %

bonds ill sell at the """""""" """"""""!bonds ill sell at the """""""" """"""""!

f the selling price of the bonds is less than thef the selling price of the bonds is less than theface amount% the bonds are selling at aface amount% the bonds are selling at a""""""""!""""""""!

f the selling price of the bonds is more than thef the selling price of the bonds is more than the

"""""""" amount% the bonds are """""""" at a"""""""" amount% the bonds are """""""" at a""""""""!""""""""!


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oThe """""""" of a bond is 'uoted as aThe """""""" of a bond is 'uoted as a"""""""" of the bonds """""""" """""""" !"""""""" of the bonds """""""" """""""" !

* 5 1%666 bond 'uoted at ;< could be """"""""* 5 1%666 bond 'uoted at ;< could be """"""""

or sold for 5 """""""" /5 """""""" 9 6!"""!or sold for 5 """""""" /5 """""""" 9 6!"""! * 5 1%666 bond 'uoted at 16; could be* 5 1%666 bond 'uoted at 16; could be

purchased or sold for 5 """""""" /5 """""""" 9purchased or sold for 5 """""""" /5 """""""" 9

""!""!""!""!


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LearningLearningObjectiveObjective=ournali>eentriesforbonds

=ournali>eentriesforbondspa(able!

pa(able!??


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"""""""" a Bond 2iscount"""""""" a Bond 2iscount

o The to methods of computing theThe to methods of computing the"""""""" of a bond discount are:"""""""" of a bond discount are:

$traight-line """""$traight-line """""

"""""""" """""""" """""""" method% sometimes"""""""" """""""" """""""" method% sometimescalled the """""""" methodcalled the """""""" method

o Both methods """""""" the same totalBoth methods """""""" the same total

amount of """""""" over the """""""" ofamount of """""""" over the """""""" of

the bonds!the bonds!


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*morti>ing a Bond 2iscount*morti>ing a Bond 2iscount

oThe """""""" """""""" """""""" method isThe """""""" """""""" """""""" method isre'uired b( generall( accepted accountingre'uired b( generall( accepted accounting

principles!principles!

o ,oever% the """""""" - """""""" method,oever% the """""""" - """""""" methodma( be used if the results """"""""ma( be used if the results """"""""

"""""""" """""""" signi#cantl( from the"""""""" """""""" signi#cantl( from the

interest method!interest method!


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Bond """"""""Bond """"""""

o * corporation ma( """""""" % or redeem%* corporation ma( """""""" % or redeem%bonds before the( """""""" ! """"""""bonds before the( """""""" ! """"""""

bonds can be """""""" b( the """"""""bonds can be """""""" b( the """"""""

corporation ithin the period of """"""""corporation ithin the period of """"""""

and at the """""""" stated in the bondand at the """""""" stated in the bond

"""""""" ! Normall(% the """""""" price is"""""""" ! Normall(% the """""""" price is

"""""""" the """""""" value!"""""""" the """""""" value!


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Bond @edemptionBond @edemption

oThe """""""" """""""" of bonds pa(able isThe """""""" """""""" of bonds pa(able isthe """""""" amount of the bonds less an(the """""""" amount of the bonds less an(

"""""""" """""""" or plus an( """""""""""""""" """""""" or plus an( """"""""

"""""""" !"""""""" !


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Bond @edemptionBond @edemption

o * gain or loss ma( be """""""" on a bond* gain or loss ma( be """""""" on a bondredemption as follos:redemption as follos:

* """""""" is recorded if the """""""" paid for* """""""" is recorded if the """""""" paid for

the """""""" is belo the bond """""""" amount!the """""""" is belo the bond """""""" amount!

* """""""" is recorded if the """""""" paid for* """""""" is recorded if the """""""" paid for

the """""""" is above the """""""" amount!the """""""" is above the """""""" amount!


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LearningLearningObjectiveObjective2escribeandillustratethe

2escribeandillustratethe

accountingforinstallmentnotes!

accountingforinstallmentnotes!

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nstallment Notesnstallment Notes

o nstallment notes are often used tonstallment notes are often used topurchase speci#c assets% such as """""""" %purchase speci#c assets% such as """""""" %

and are often """""""" b( the purchasedand are often """""""" b( the purchased

asset!asset!

o 8hen a note is secured b( an """""""" % it8hen a note is secured b( an """""""" % it

is called a """""""" note!is called a """""""" note!

o f the """""""" fails to pa( a """""""" note%f the """""""" fails to pa( a """""""" note%

the lender has the """""""" to ta+ethe lender has the """""""" to ta+e

"""""""" of the """""""" asset!"""""""" of the """""""" asset!


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LearningLearningObjectiveObjective2escribeandillustratethe

2escribeandillustratethe

reportingoflong-termliabilities

reportingoflong-termliabilities

includingbondsandnotes

includingbondsandnotespa(able!

pa(able!

AA


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LearningLearningObjectiveObjective2escribeandillustratehothe

2escribeandillustratehothe

numberoftimesinterestcharges

numberoftimesinterestcharges

areearnedisusedtoevaluatea

areearnedisusedtoevaluatea

compan(:s#nancialcondition!

compan(:s#nancialcondition!

BB


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Number of Times """""" Charges areNumber of Times """""" Charges are""""""""""""""""

o *nal(sts """""""" the ris+ that bondholders*nal(sts """""""" the ris+ that bondholdersill not receive their """""""" pa(ments b(ill not receive their """""""" pa(ments b(computing the """""""" of """""""" """"""""computing the """""""" of """""""" """"""""

"""""""" are """""""" during the (ear as"""""""" are """""""" during the (ear as

follos:follos:

Number of

Times Interest

Charges are

Earned

=


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*ppendi91:

*ppendi91:

0resenta

lueConcepts

0resenta

lueConcepts

and0ricin

gBonds0

a(able

and0ricin

gBonds0

a(able


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0resent alue0resent alue ConceptDConceptD""""""""""""""""BondsBonds""""""""""""""""

o 8hen a corporation issues bonds% the8hen a corporation issues bonds% theprice that """""""" are illing to """"""""price that """""""" are illing to """"""""

for the bonds depends on the folloing:for the bonds depends on the folloing:

The """""""" amount of the bonds% hich is theThe """""""" amount of the bonds% hich is theamount due at the """""""" """""""" !amount due at the """""""" """""""" !

The """""""" interest to be """""""" on theThe """""""" interest to be """""""" on the

bonds!bonds!

The """""""" rate of """""""" !The """""""" rate of """""""" !


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"""""""" """""""""""""""" """""""" ConceptConcept

oThe time value of """""""" conceptThe time value of """""""" conceptrecogni>esrecogni>esthat an amount of cash """"""" """""""" isthat an amount of cash """"""" """""""" is

orth more than the same amount of """"""""orth more than the same amount of """"""""

to be """""""" in the """""""" !to be """""""" in the """""""" !

o"""""""" value is the current orth of a"""""""" value is the current orth of a

"""""""" sum of """""""" or stream of """""""""""""""" sum of """""""" or stream of """"""""

Fos given a """""""" rate of """""""" !Fos given a """""""" rate of """""""" !

oThe amount to be """""""" in the """""""" ifThe amount to be """""""" in the """""""" if(ou ma+e a deposit no is the """"""""(ou ma+e a deposit no is the """"""""

""""""""!""""""""!


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0resent alue of the """""""" """"""""0resent alue of the """""""" """"""""

o * """""""" of e'ual cash receipts spaced* """""""" of e'ual cash receipts spaced"""""""" in time is called an """""""" !"""""""" in time is called an """""""" !

oThe """""""" """""""" of an annuit( is theThe """""""" """""""" of an annuit( is the

sum of the """""""" """""""" of each cashsum of the """""""" """""""" of each cashreceipt!receipt!


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*ppendi93:

*ppendi93:

&.ective

nterest@ate

&.ective

nterest@ate7eth

odof

7ethodo

f

*morti>a

tion

*morti>a

tion


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&.ective """""""" """""""" 7ethod&.ective """""""" """""""" 7ethod

oThe """""""" """""""" """""""" method ofThe """""""" """""""" """""""" method ofamorti>ation% sometimes called theamorti>ation% sometimes called the

________ method________ method% provides for a """"""""% provides for a """"""""

raterateof interest over the """""""" of theof interest over the """""""" of the

bonds!bonds!


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Long-Term

Long-Term

Liabilities:

Liabilities:

Bondsand

BondsandNote

sNote

sThe&ndThe&nd

Chapter 14 - Long-term Liabilities Bonds and Notes

Documents

Transcript of Chapter 14 - Long-term Liabilities Bonds and Notes