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Spiceland | Thomas | Herrmann
Financial Accounting
Long-Term Liabilities
Chapter 9
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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Learning Objectives
• Explain financing alternatives• Identify the characteristics of bonds• Determine the price of a bond issue• Account for the issuance of bonds• Record the retirement of bonds• Identify other major long-term liabilities• Make financial decisions using long-term liability
ratios
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Part A
Overview of Long-Term Debt
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Learning Objective 1
Explain financing alternatives
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Financing Alternatives
• Capital structure: mixture of liabilities and stockholders’ equity a business uses• Debt financing: borrowing money• Equity financing: obtaining additional investment
from stockholders
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective 2
Identify the characteristics of bonds
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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What Are Bonds?
• Formal debt instrument• Usually issued to many lenders• Borrower repays the principal or face amount, at a
specified maturity date• Pay interest over the life of the bond
• Private placement: selling debt securities directly to a single investor
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Characteristics of Bonds
• Secured bonds• Unsecured bonds• Term bonds• Serial bonds• Callable bonds• Convertible bonds
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Illustration 9.1—Summary of BondCharacteristics
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Illustration 9.2—Timeline of aBond Issue
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Part B
Pricing a Bond
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Learning Objective 3
Determine the price of a bond issue
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Illustration 9.3—Pricing Bonds Issued at Face Amount Using a Financial Calculator
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Illustration 9.4—Pricing Bonds Issued at Face Amount Using Excel
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Illustration 9.5—Pricing Bonds Issued at Face Amount Using Present Value Tables
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Illustration 9.6—Pricing Bonds Issued at a Discount Using a Financial Calculator
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Illustration 9.9—Pricing Bonds Issued at a Premium Using a Financial Calculator
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Illustration 9.12—Stated Rate, Market Rate, and the Bond Issue Price
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Part C
Recording Bonds Payable
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Learning Objective 4
Account for the issuance of bonds
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Recording Bonds Payable—Issued at Face Value
• Bonds issue for exactly $100,000, assuming a 7% market interest rate
• First semiannual interest payment:
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Recording Bonds Payable—Issued at Discount
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Illustration 9.13—Amortization Schedule for Bonds Issued at a Discount
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Recording Bonds Payable—Issued at Premium
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Illustration 9.14—Amortization Schedule for Bonds Issued at a Premium
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Illustration 9.15—Changes in Carrying Value over Time
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Learning Objective 5
Record the retirement of bonds
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Recording Bond Retirements—At Maturity
• Retired: buy back of bonds from the investors
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Recording Bond Retirements—Before Maturity
• Early extinguishment of debt: retirement of debt before its scheduled maturity
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Part D
Other Long-Term Liabilities
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Learning Objective 6
Identify other major long-term liabilities
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Installment Notes
• Requires installment payments• Installment payment: payment includes interest
and outstanding balance
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Illustration 9.16—Amortization Schedule for an Installment Note
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Recording Installment Payments of Note
• For first two months
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Leases
• Contractual arrangement between lessor (owner) and lessee (user) to provide the right to use an asset for a specified period of time
• Types:• Operating leases: lessor owns the asset, and the
lessee simply uses the asset temporarily• Capital leases: lessee buys an asset and borrows
the money through a lease to pay for the asset
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Learning Objective 7
Make financial decisions using long-term liability ratios
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Debt Analysis
• Business decisions include risk• Failure to properly consider risk could prove costly• Long-term debt management is crucial• Measuring a company’s risk:
• Debt to equity ratio• Times interest earned ratio
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Debt to Equity Ratio
• Measure of financial leverage
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Times Interest Earned Ratio
• Compares interest expense with income available to pay those charges
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End of Chapter 9
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