1 / 54

Long-Term Debt Financing

11. C H A P T E R . Long-Term Debt Financing. Learning Objective 1. Use present value concepts to measure long-term liabilities. Define Long-Term Liabilities. Present value of $1 is the value today of $1 to be received or paid in the future, given a specific interest rate.

dinh
Download Presentation

Long-Term Debt Financing

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. 11 • C H A P T E R Long-Term Debt Financing

  2. Learning Objective 1 • Use present value concepts to measure long-term liabilities.

  3. Define Long-Term Liabilities

  4. Present value of $1 is the value today of $1 to be received or paid in the future, given a specific interest rate. Accounting forLong-Term Liabilities • Measurement and recording of long-term liabilities are based on the time value of money concept. If money can earn 10% per year, $100 to be received 1 year from now is approximately equal to $90.91 received today.

  5. Present Value Table Locate the number of periods in the left column and the interest rate in the row at the top of the table. This intersection is the factor representing the present value of $1. Discounting—present value amount is the amount that could be paid today to satisfy the obligation. Present and FutureValue Tables Future Value Table Locate the number of periods in the left column and the interest rate in the row at the top of the table. This intersection is the factor representing the future value of $1. Compounding—the frequency with which interest is added to the principal.

  6. Today 1 2 3 4 Future Discount at 10% $82.64 $100 PresentValue Present value of $100 paid in 5 years discounted at 10 percent. PV = $62.09 $90.90

  7. Today 1 2 3 4 Future Compound at 10% $100 $121 Future Value Future value of $100 today compounded for 5 years at 10 percent. $110 FV = $161.05

  8. Value Table — Future Value Joan invested $2,000 for 3 years at 12 percent, compounded annually.Using the table below, what is the future value of the $2,000? Periods 6% 8% 10% 12% 3 1.1910 1.2597 1.3310 1.4049 4 1.2625 1.3605 1.4641 1.5735 5 1.3382 1.4693 1.6105 1.7623 6 1.4185 1.5869 1.7716 1.9738

  9. Value Table — Future Value Joan invested $2,000 for 3 years at 12 percent, compounded semiannually. Using the table below, what is the future value of the $2,000? Periods 6% 8% 10% 12% 3 1.1910 1.2597 1.3310 1.4049 4 1.2625 1.3605 1.4641 1.5735 5 1.3382 1.4693 1.6105 1.7623 6 1.4185 1.5869 1.7716 1.9738

  10. Computing the Interest RateProvide the Appropriate Formula. Interest rate per compounding period = Number of interest periods =

  11. Define Annuities • Annuity • Present Value of an Annuity

  12. Value Tables — Annuity Joan is paid $8,000 a year for 8 years at 10 percent interest per year. Using the table below, what is the present value of the annuity? Periods 6% 8% 10% 12% 7 5.5824 5.2064 4.8684 4.5683 8 6.2098 5.7466 5.3349 4.9676 9 6.8017 6.2469 5.7590 5.3282 10 7.3601 6.7101 6.1446 5.6502

  13. Learning Objective 2 • Account for long-term liabilities, including notes payable and mortgages payable.

  14. + Bond Bond Note Payable – Mortgage Payable Bond Pay Choose Issue Amortize Retire Time Line ofBusiness Issues

  15. On January 1, 2004, Silver Eagle Co. borrowed $20,000 for 3 years at 12 percent interest. The interest is payable on December 31 of each year. What entries are necessary for 2004? Example: Interest-Bearing Notes

  16. What entry is needed when Silver Eagle Co. repays the loan on December 31, 2005? Example: Interest-Bearing Notes

  17. What is a Mortgage Payable?

  18. Example: Mortgages Payable On January 1, 2006, Blue Bird Corp. borrowed $500,000 to acquire a new building. The building was signed as collateral for the 30-year, 7 percent loan. Payments of $3,326.51 are to be made monthly. What are the January 2006 entries?

  19. Mortgages Payable A mortgage amortization schedule shows the breakdown between interest and principal for each payment over the life of a mortgage. Monthly Principal Interest Mortgage MonthPayment Paid Paid Balance 1 3,326.51 409.84 2,916.67 499,590.16 2 3,326.51 412.23 2,914.28 499,177.93 3 3,326.51 414.64 2,911.87 498,763.29 4 3,326.51 417.06 2,909.45 498,346.23 5 3,326.51 419.49 2,907.02 497,926.74 6 3,326.51 421.94 2,904.57 497,504.80

  20. Learning Objective 3 Account for capital lease obligations and understand the significance of operating leases being excluded from the balance sheet.

  21. Lease ObligationsMatch the Following Terms. Lessor Operating Lease Lease Lessee Capital Lease • The party that is granted the right to use property under the terms of a lease. • The owner of property that is rented (leased) to another party. • A simple short-term rental agreement. • A leasing transaction that is recorded as a purchase by the lessee. • A contract that specifies the terms under which the owner of an asset agrees to transfer the right to use the asset to another party.

  22. Transfer of Ownership? Bargain Purchase Option? Term ³ 75% of Useful Life? Capital Lease Operating Lease PV Payment ³ 90% of FMV? Classifying Leases • If the lease is cancelable or does not meet any of the four requirements, is it an operating lease?

  23. Example: Lease Obligations On January 1, 2006, The Cockatoo Company leased a computer. The lease requires annual payments of $5,000 for 8 years. The applicable interest rate is 12 percent. How is the lease recorded? What is the December 31, 2006 entry for interest expense?

  24. Learning Objective 4 • Account for bonds, including the original issuance, the payment of interest, and the retirement of bonds.

  25. Define These Types of Bonds Bond Unsecured Bonds (Debentures) Secured Bonds Coupon (Bearer) Bonds

  26. Types of Bonds Matching • Bonds that mature in one lump sum on a specified future date. • Bonds that mature in a series of installments at specified future dates. • Bonds for which the issuer reserves the right to pay the obligation before its maturity date. • Bonds that can be traded for, or converted to, other securities after a specified period of time. • The names and addresses of the bondholders are kept on file by the issuing company. Serial Bonds Convertible Bonds Term Bonds Callable Bonds Registered Bonds

  27. Discuss These Types of Bonds Zero-Coupon Bonds Junk Bonds

  28. Principal (face value or market value) Bond Maturity Date Bond Indenture Characteristics of Bonds Match Correctly. A contract between a bond issuer and a bond purchaser that specifies the terms of a bond. The amount that will be paid on a bond at the maturity date. The date at which a bond principal or face amount becomes payable. A contract between a bond issuer and a bond purchaser that specifies the terms of a bond. The amount that will be paid on a bond at the maturity date. The date at which a bond principal or face amount becomes payable.

  29. How Do You Determine Issuance Price? Price should equal: Market rate (effective rate or yield rate) of interest Stated rate of interest

  30. Determining Issuance Price Correctly Define Each Term Face Value Bond Discount Bond Premium

  31. 8% 10% 12% Characteristics of Bonds Complete the Chart Market Rate Bond Sold at Bond Stated Interest Rate 10%

  32. 1. Semiannual interest payments Present value of interest annuity 2. Maturity value of bonds Present value of bonds 3. Issuance price of bonds Example: Bond Issued at Face Value Falcon Company agreed to issue 5-year, $500,000 bonds and pay 10 percent interest, compounded semiannually. Assume the effective and stated rates are equal. Calculate the issue price.

  33. 1. Semiannual interest payments Present value of interest annuity 2. Maturity value of bonds Present value of bonds 3. Issuance price of bonds Example: Bond Issuedat a Discount Falcon Company agreed to issue 5-year, $500,000 bonds and pay 10 percent interest, compounded semiannually. Assume the effective rate is 12 percent. Calculate the issue price of the bonds.

  34. 1. Semiannual interest payments Present value of interest annuity 2. Maturity value of bonds Present value of bonds 3. Issuance price of bonds Example: Bond Issuedat a Premium Falcon Company agreed to issue 5-year, $500,000 bonds and pay 10 percent interest, compounded semiannually. Assume the effective rate is 8 percent. Calculate the issue price of the bonds.

  35. Example: Accounting for Bonds Payable On January 1, 2006, Falcon Company agreed to issue 5-year, $500,000 bonds and pay 10 percent interest, compounded semiannually. Assume the effective rate is 10 percent. What entry is needed to record the liability?

  36. Example: Accounting for Bonds Payable On January 1, 2006, Falcon Company agreed to issue 5-year, $500,000 bonds and pay 10 percent interest, compounded semiannually. Assume the effective rate is 10 percent. What entry is needed to record the first interest payment?

  37. Example: Bond Retirements at Maturity On January 1, 2006, Falcon Company agreed to issue 5-year, $500,000 bonds and pay 10 percent interest, compounded semiannually. Assume the effective rate is 10 percent. What entry is needed to record the retirement of the bond on January 1, 2011?

  38. Example: Bond Retirements Before Maturity The Great Owl Company issued $200,000, 14 percent bonds, which are now selling for 107 and are callable at 110. The bonds were issued at face value. If the company decides to call the bonds, what entry is needed?

  39. Learning Objective 5 Use debt-related ratios to determine the degree of a company’s financial leverage and its ability to repay loans

  40. Define Debt Ratio

  41. Define Debt-to-Equity Ratio

  42. Times Interest Earned Ratio

  43. Expanded MaterialLearning Objective 6 • Amortize bond discounts and bond premiums using either the straight-line method or the effective-interest method.

  44. Which method is preferred by GAAP? Define the Two Bond Premium/Discount Amortization Methods • Straight-line Method • Effective-interest Method

  45. Example: Bond Issuedat a Discount On January 1, 2006, The Ostrich Company agreed to issue 10-year, $200,000 bonds and pay 10 percent interest, compounded semiannually. The company received $196,000 for the bonds. Make the entry to record the issuance of the bonds.

  46. Example: Bond Issuedat a Discount On January 1, 2006, The Ostrich Company agreed to issue 10-year, $200,000 bonds and pay 10 percent interest, compounded semiannually. Using straight-line amortization, what entry is made for the interest payment on June 30, 2006?

  47. Example: Bond Issuedat a Discount On January 1, 2006, The Ostrich Company agreed to issue 10-year, $200,000 bonds and pay 10 percent interest, compounded semiannually. Using straight-line amortization, what adjusting entry is needed on December 31, 2006?

  48. Example: Bond Issuedat a Discount On January 1, 2006, The Ostrich Company agreed to issue 10-year, $200,000 bonds and pay 10 percent interest, compounded semiannually. What entry is necessary to retire the debt after 10 years?

  49. Example: Bond Issuedat a Premium On January 1, 2006, The Parrot Company agreed to issue 10-year, $200,000 bonds and pay 10 percent interest, compounded semiannually. The company received $210,000 for the bonds. Make the entry to record the issuance of the bonds.

  50. Example: Bond Issuedat a Premium On January 1, 2006, The Parrot Company agreed to issue 10-year, $200,000 bonds and pay 10 percent interest, compounded semiannually. The company received $210,000 for the bonds. Using straight-line amortization, what entry is made for the interest payment on June 30, 2006?

More Related