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CHAPTER 14
Long-Term Liabilities……..…………………………………………………………...
Covenants on Long-Term Debt
Liquidity and solvency requirements
Current cash debtcoverage ratio
Net Cash from Operations
Average Current Liabilities=
Debt tototal assets
Total Debt
Total Assets=
Bond Indenture
UnderwriteStated
(nominal)Rate
Face (maturity) value
DebentureBond
Serial Bonds
ConvertibleBond
DeepDiscountBondsBearer
Bonds
Periods Rate PV Annuity FV AD?
What would you pay for a $50,000 bond that matures in 15 years and pays $5,000 a year in interest if you wanted to earn a 12% return?
VALUATION OF BONDS PAYABLE
Actual rate (10%) < Market rate (12%)
Discount
Periods Rate PV Annuity FV AD?
What would you pay for a $50,000, 10-year, 8% bond with interest paid semiannually if the market rate is 7%?
Actual rate (8%) > Market rate (7%)
Premium
Bonds Issues at Premium at Interest Date
1/1/03 Issued $50,000, 10-year, 8% bonds.Interest paid every January 1 and July 1.Sold for $53,553 (market rate = 7%).
1/1/03
(To record issuance of bonds)
7/1/03
(To record interest payment.)
Straight Line Amortization
12/31/03
(To accrue interest on bonds.)
Effective Interest Method of Amortization
1/1/03 Issued $50,000, 10-year, 8% bonds.Sold for $53,553 (market rate = 7%).
7/1/03
(To record interest payment.)
DateCash
PaymentInterest(3.5%)
PremiumAmortiz
CarryingAmount
1/1/03 53,553
7/1/03
1/1/04
DateCash
PaymentInterest(3.5%)
PremiumAmortiz
CarryingAmount
1/1/03 53,553
7/1/03 (2,000) 1,874 126 53,427
1/1/04 (2,000) 1,870 130 53,297
12/31/03 Interest Expense
Bond Interest Payable
Premium on Bonds Pay
(To accrue interest on bonds.)
BONDS PAYABLE: OTHER ISSUES
Bond Issue Costs
7/1/03 Cash 20,550
Premium on Bonds Payable 790
Unamortized Bond Issue Costs 240
(To record issuance of bonds.)
12/31/03
Bonds Payable 20,000
(To amortize bond issue costs.)
Early Extinguishment of Debt
1/1/03 Issued $50,000, 10-year, 8% bonds.Sold for $53,553 (market rate = 7%).
Bonds Payable
50,000
Prem. on Bonds
3,5537/1/031261/1/03 1307/1/04 135
7/1/04 Called the bonds at 108.
How much cash paid?
What is the unamortized premium?
7/1/04
(To record redemption of bonds.)
Early Extinguishment of Debt
7/1/04 Called the bonds at 108.
How much cash paid?
What is the unamortized premium?
9/1/04
(To accrue interest on bonds.)
What if bonds are called 9/1/04, not 7/1/04?
Update your records!
DateCash
PaymentInterest(3.5%)
PremiumAmortiz
CarryingAmount
1/1/04 (2,000) 1,870 130 53,297
7/1/04 (2,000) 1,865 135 53,162
1/1/05
Determine interest for a full 6-months
Record 2-months’ worth.
9/1/04 Bonds Payable
Premium on Bonds Payable
Cash
9/1/04 Called the bonds at 108 plus accrued interest of $667.
How much cash paid? $54,667
What is the unamortized premium? $3,115
NOTES PAYABLE
Notes Issued at Below Face Value
1/1/03 Issued $50,000, 3-year, non-interest bearing note for $40,024.
Periods Rate PV Annuity FV AD?
1/1/03 Cash
Notes Payable
Discount on Notes Payable
Periods Rate PV Annuity FV AD?
Cash Received for Note & Rights
• $100,000, 3-year, non-interest bearing note
• the right to buy merchandise at a discount.
• $100,000 cash
GaveReceived
Mkt = 8%
1/1/03 Cash
Notes Payable
Discount on Notes Payable
Periods Rate PV Annuity FV AD?
6 4% ? -1,000 -100,000 N84,274
Property Received for Note
• $100,000, 3-year, 2% note, semiannual interest
• Equipment
GaveReceived
Mkt = 8%
1/1/03
7/1/03 Interest Expense
Cash 1,000
REPORTING OF LONG-TERM DEBT
Off-balance-sheetfinancing
Presentation
motivation
project financing deals
Enron
assets pledged
fair value of debt
future payments for sinking fund requirements
maturity amounts
