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TOPIC 7 Non-Current Liabilities: Bonds and Notes

12. TOPIC 7 Non-Current Liabilities: Bonds and Notes. Compute the potential impact of long-term borrowing on earnings per share. 1. Describe the characteristics and terminology of bonds payable. 2. 3. Journalize entries for bonds payable. Learning Objective 1. Learning Objective 1.

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TOPIC 7 Non-Current Liabilities: Bonds and Notes

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  1. 12 TOPIC 7 Non-Current Liabilities: Bonds and Notes

  2. Compute the potential impact of long-term borrowing on earnings per share. 1 Describe the characteristics and terminology of bonds payable. 2 3 Journalize entries for bonds payable. Learning Objective 1 Learning Objective 1 Non-Current Liabilities: Bonds and Notes 3-1 3-1 After studying this chapter, you should be able to: Insert Chapter Objectives Describe the nature of the adjusting process. Describe the nature of the adjusting process. 12-2

  3. Describe and illustrate the reporting of non-current liabilities including bonds and notes payable. 5 4 Describe and illustrate the accounting for installment notes. Non-Current Liabilities: Bonds and Notes (continued) 12-3

  4. 1 Compute the potential impact of long-term borrowing on earnings per share. 12-4

  5. 1 Bond A bond is simply a form of an interest-bearing note. Like a note, a bond requires periodic interest payments, and the face amount must be repaid at the maturity date.

  6. 2 Describe the characteristics and terminology of bonds payable. 12-12

  7. 2 Bond Characteristics and Terminology The underlying contract between the company issuing bonds and the bondholders is called a bond indenture or trust indenture.

  8. 2 Bond Characteristics and Terminology Usually, the face value of each bond, called the principal, is $1,000 or a multiple of $1,000. Interest on bonds may be payable annually, semiannually, or quarterly. Most pay interest semiannually.

  9. 2 Bond Characteristics and Terminology • When all bonds of an issue mature at the same time, they are called term bonds. • Ifthe bonds mature over several dates, they are calledserial bonds. • Bonds that may be exchanged for other securities, such as common stock, are calledconvertible bonds.

  10. 2 Bond Characteristics and Terminology • Bonds that a corporation reserves the right to redeem before their maturity are called callable bonds. • Bonds issued on the basis of the general credit of thecorporation are calleddebenture bonds.

  11. 2 Proceeds from Issuing Bonds The market or effective rate of interest is determined by transactions between buyers and sellers of similar bonds. The market rate of interest is affected by a variety of factors, including investors’ expectations of current and future economic conditions.

  12. 2 MARKET RATE = CONTRACT RATE Selling price of bond = $1,000 If the contract rate equals the market rate of interest, the bonds will sell at their face amount.

  13. Discount 2 MARKET RATE > CONTRACT RATE Selling price of bond < $1,000 – If the market rate is higher than the contract rate, the bonds will sell at a discount.

  14. Premium 2 MARKET < CONTRACT RATE Selling price of bond > $1,000 + If the market rate is lower than the contract rate, the bonds will sell at a premium.

  15. 4 Describe and illustrate the accounting for installment notes. 12-40

  16. 4 Installment Notes An installment note is a debt that requires the borrower to make equal periodic payments to the lender for the term of the note. Unlike bonds, a note payment consists of payment of a portion of the amount initially borrowed (the principal) and payment of interest on the outstanding balance.

  17. 4 Issuing an Installment Note Lewis Company issues a $24,000, 6%, five-year note to City National Bank on January 1, 2008. The annual payment is $5,698.

  18. 4 Amortization of Installment Notes

  19. 4 The entry to record the first payment on December 31, 2008, is as follows: (Column C of Exhibit 3) (Column D of Exhibit 3)

  20. 4 The entry to record the second payment on December 31, 2009, is as follows: (Column C of Exhibit 3) (Column D of Exhibit 3)

  21. 4 The entry to record the final payment on December 31, 2012, is as follows: (Column C of Exhibit 3) (Column D of Exhibit 3) After the entry is posted, the balance in Notes Payable related to this note is zero.

  22. 4 Example Exercise 12-7 JournalizingInstallment Notes On the first day of the fiscal year, a company issues a $30,000, 10%, five-year installment note that has annual payments of $7,914. The first note payment consists of $3,000 of interest and $4,914 of principal repayment. • Journalize the entry to record the issuance of the installment note. • Journalize the first annual note payment. 12-47

  23. Follow My Example 12-7 4 Example Exercise 12-7 (continued) a. b. 12-48 For Practice: PE 12-7A, PE 12-7B

  24. 5 Describe and illustrate the reporting of non-current liabilities including bonds and notes payable. 12-49

  25. 5

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