Kế toán, kiểm toán - Chương 14: Non - Current liabilities

C H A P T E R 14NON-CURRENT LIABILITIESIntermediate AccountingIFRS EditionKieso, Weygandt, and Warfield Describe the formal procedures associated with issuing long-term debt.Identify various types of bond issues.Describe the accounting valuation for bonds at date of issuance.Apply the methods of bond discount and premium amortization.Explain the accounting for long-term notes payable.Describe the accounting for the extinguishment of non-current liabilities.Describe the accounting for the fair value option.Explain the reporting of off-balance-sheet financing arrangements.Indicate how to present and analyze non-current liabilities.Learning ObjectivesBonds PayableLong-Term Notes PayableSpecial IssuesIssuing bondsTypes and ratingsValuationEffective-interest methodNotes issued at face valueNotes not issued at face valueSpecial situationsMortgage notes payableExtinguishmentsFair value optionOff-balance-sheet financingPresentation and analysisLong-Term LiabilitiesBonds PayableNon-current liabilities (long-term debt) consist of an expected outflow of resources arising from present obligations that are not payable within a year or the operating cycle of the company, whichever is longer. LO 1 Describe the formal procedures associated with issuing long-term debt.Examples: Bonds payableLong-term notes payableMortgages payablePension liabilities Lease liabilitiesLong-term debt has various covenants or restrictions.Issuing BondsLO 1 Describe the formal procedures associated with issuing long-term debt.Bond contract known as a bond indenture.Represents a promise to pay: sum of money at designated maturity date, plusperiodic interest at a specified rate on the maturity amount (face value).Paper certificate, typically a $1,000 face value. Interest payments usually made semiannually. Used when the amount of capital needed is too large for one lender to supply.Types and Ratings of BondsLO 2 Identify various types of bond issues.Common types found in practice:Secured and Unsecured (debenture) bonds.Term, Serial, and Callable bonds.Convertible, Commodity-Backed, Deep-Discount bonds.Registered and Bearer (Coupon) bonds.Income and Revenue bonds.Types and Ratings of BondsLO 2 Identify various types of bond issues.Corporate bond listing.Company NameInterest rate paid as a % of par valuePrice as a % of parInterest rate based on priceCreditworthinessValuation of Bonds PayableLO 3 Describe the accounting valuation for bonds at date of issuance.Issuance and marketing of bonds to the public:Usually takes weeks or months. Issuing company mustArrange for underwriters. Obtain regulatory approval of the bond issue, undergo audits, and issue a prospectus.Have bond certificates printed. Valuation of Bonds PayableLO 3 Describe the accounting valuation for bonds at date of issuance.Selling price of a bond issue is set by the supply and demand of buyers and sellers, relative risk, market conditions, and state of the economy.Investment community values a bond at the present value of its expected future cash flows, which consist of (1) interest and (2) principal.Interest RateStated, coupon, or nominal rate = Rate written in the terms of the bond indenture. Bond issuer sets this rate.Stated as a percentage of bond face value (par).Market rate or effective yield = Rate that provides an acceptable return commensurate with the issuer’s risk. Rate of interest actually earned by the bondholders.Valuation of Bonds PayableLO 3 Describe the accounting valuation for bonds at date of issuance.How do you calculate the amount of interest that is actually paid to the bondholder each period?How do you calculate the amount of interest that is actually recorded as interest expense by the issuer of the bonds?Valuation of Bonds PayableLO 3 Describe the accounting valuation for bonds at date of issuance.(Stated rate x Face Value of the bond)(Market rate x Carrying Value of the bond)Bonds Sold AtMarket Interest6%8%10%PremiumPar ValueDiscountValuation of Bonds PayableLO 3Assume Stated Rate of 8%Illustration: Santos Company issues $100,000 in bonds dated January 1, 2011, due in five years with 9 percent interest payable annually on January 1. At the time of issue, the market rate for such bonds is 9 percent.LO 3 Describe the accounting valuation for bonds at date of issuance.Bonds Issued at ParIllustration 14-1Illustration 14-1LO 3 Describe the accounting valuation for bonds at date of issuance.Bonds Issued at ParIllustration 14-2Journal entry on date of issue, Jan. 1, 2011.Bonds Issued at Par Cash 100,000 Bonds payable 100,000Journal entry to record accrued interest at Dec. 31, 2011. Bond interest expense 9,000 Bond interest payable 9,000Journal entry to record first payment on Jan. 1, 2012. Bond interest payable 9,000 Cash 9,000LO 3Illustration: Assuming now that Santos issues $100,000 in bonds, due in five years with 9 percent interest payable annually at year-end. At the time of issue, the market rate for such bonds is 11 percent.LO 3 Describe the accounting valuation for bonds at date of issuance.Bonds Issued at a DiscountIllustration 14-3Illustration 14-3LO 3 Describe the accounting valuation for bonds at date of issuance.Bonds Issued at a DiscountIllustration 14-4Journal entry on date of issue, Jan. 1, 2011.Bonds Issued at a Discount Cash 92,608 Bonds payable 92,608Journal entry to record accrued interest at Dec. 31, 2011. Bond interest expense 10,187 Bond interest payable 9,000 Bonds payable 1,187Journal entry to record first payment on Jan. 1, 2012. Bond interest payable 9,000 Cash 9,000LO 3When bonds sell at less than face value: Investors demand a rate of interest higher than stated rate. Usually occurs because investors can earn a higher rate on alternative investments of equal risk. Cannot change stated rate so investors refuse to pay face value for the bonds. Investors receive interest at the stated rate computed on the face value, but they actually earn at an effective rate because they paid less than face value for the bonds.Bonds Issued at a DiscountLO 3 Describe the accounting valuation for bonds at date of issuance.Bond issued at a discount - amount paid at maturity is more than the issue amount. Bonds issued at a premium - company pays less at maturity relative to the issue price. Adjustment to the cost is recorded as bond interest expense over the life of the bonds through a process called amortization. Required procedure for amortization is the effective-interest method (also called present value amortization).LO 4 Apply the methods of bond discount and premium amortization.Effective-Interest MethodEffective-interest method produces a periodic interest expense equal to a constant percentage of the carrying value of the bonds.LO 4 Apply the methods of bond discount and premium amortization.Effective-Interest MethodIllustration 14-5LO 4 Apply the methods of bond discount and premium amortization.Effective-Interest MethodBonds Issued at a DiscountIllustration 14-6Illustration: Evermaster Corporation issued $100,000 of 8% term bonds on January 1, 2011, due on January 1, 2016, with interest payable each July 1 and January 1. Investors require an effective-interest rate of 10%. Calculate the bond proceeds.LO 4Effective-Interest MethodIllustration 14-7LO 4Effective-Interest MethodIllustration 14-7Journal entry on date of issue, Jan. 1, 2011. Cash 92,278 Bonds payable 92,278LO 4Effective-Interest MethodIllustration 14-7 Bond interest expense 4,614 Bonds payable 614 Cash 4,000Journal entry to record first payment and amortization of the discount on July 1, 2011. LO 4Effective-Interest MethodIllustration 14-7Journal entry to record accrued interest and amortization of the discount on Dec. 31, 2011. Bond interest expense 4,645 Bond interest payable 4,000 Bonds payable 645Illustration: Evermaster Corporation issued $100,000 of 8% term bonds on January 1, 2011, due on January 1, 2016, with interest payable each July 1 and January 1. Investors require an effective-interest rate of 6%. Calculate the bond proceeds.LO 4 Apply the methods of bond discount and premium amortization.Effective-Interest MethodBonds Issued at a PremiumIllustration 14-8LO 4Effective-Interest MethodIllustration 14-9LO 4Effective-Interest MethodIllustration 14-9Journal entry on date of issue, Jan. 1, 2011. Cash 108,530 Bonds payable 108,530LO 4Effective-Interest MethodIllustration 14-9 Bond interest expense 3,256 Bonds payable 744 Cash 4,000Journal entry to record first payment and amortization of the premium on July 1, 2011. What happens if Evermaster prepares financial statements at the end of February 2011? In this case, the company prorates the premium by the appropriate number of months to arrive at the proper interest expense, as follows.LO 4 Apply the methods of bond discount and premium amortization.Effective-Interest MethodAccrued InterestIllustration 14-10Evermaster records this accrual as follows.LO 4 Apply the methods of bond discount and premium amortization.Effective-Interest MethodAccrued InterestIllustration 14-10 Bond interest expense 1,085.33 Bonds payable 248.00 Bond interest payable 1,333.33Bond investors will pay the seller the interest accrued from the last interest payment date to the date of issue.On the next semiannual interest payment date, bond investors will receive the full six months’ interest payment.LO 4 Apply the methods of bond discount and premium amortization.Effective-Interest MethodBonds Issued between Interest DatesIllustration: Assume Evermaster issued its five-year bonds, dated January 1, 2011, on May 1, 2011, at par ($100,000). Evermaster records the issuance of the bonds between interest dates as follows.LO 4 Apply the methods of bond discount and premium amortization.Effective-Interest Method Cash 100,000 Bonds payable 100,000 Cash 2,667 Bond interest expense 2,667($100,000 x .08 x 4/12) = $2,667Bonds Issued at ParOn July 1, 2011, two months after the date of purchase, Evermaster pays the investors six months’ interest, by making the following entry.LO 4Effective-Interest Method Bond interest expense 4,000 Cash 4,000($100,000 x .08 x 1/2) = $4,000Bonds Issued at ParBonds Issued at Discount or PremiumLO 4 Apply the methods of bond discount and premium amortization.Effective-Interest MethodIllustration: Assume that the Evermaster 8% bonds were issued on May 1, 2011, to yield 6%. Thus, the bonds are issued at a premium price of $108,039. Evermaster records the issuance of the bonds between interest dates as follows. Cash 108,039 Bonds payable 108,039 Cash 2,667 Bond interest expense 2,667Bonds Issued at Discount or PremiumLO 4 Apply the methods of bond discount and premium amortization.Effective-Interest MethodEvermaster then determines interest expense from the date of sale (May 1, 2011), not from the date of the bonds (January 1, 2011).Illustration 14-12Bonds Issued at Discount or PremiumLO 4 Apply the methods of bond discount and premium amortization.Effective-Interest MethodThe premium amortization of the bonds is also for only two months.Illustration 14-13Bonds Issued at Discount or PremiumLO 4 Apply the methods of bond discount and premium amortization.Effective-Interest MethodEvermaster therefore makes the following entries on July 1, 2011, to record the interest payment and the premium amortization. Bond interest expense 4,000 Cash 4,000 Bonds payable 253 Bond interest expense 253Long-Term Notes PayableAccounting is Similar to BondsA note is valued at the present value of its future interest and principal cash flows. Company amortizes any discount or premium over the life of the note.LO 5 Explain the accounting for long-term notes payable.BE14-9: Coldwell, Inc. issued a $100,000, 4-year, 10% note at face value to Flint Hills Bank on January 1, 2011, and received $100,000 cash. The note requires annual interest payments each December 31. Prepare Coldwell’s journal entries to record (a) the issuance of the note and (b) the December 31 interest payment.Notes Issued at Face Value(a) Cash 100,000 Notes payable 100,000(b) Interest expense 10,000 Cash 10,000 ($100,000 x 10% = $10,000) LO 5 Explain the accounting for long-term notes payable.Notes Not Issued at Face ValueIssuing company records the difference between the face amount and the present value (cash received) as a discount and amortizes that amount to interest expense over the life of the note.LO 5 Explain the accounting for long-term notes payable.Zero-Interest-Bearing NotesBE14-10: Samson Corporation issued a 4-year, $75,000, zero-interest-bearing note to Brown Company on January 1, 2011, and received cash of $47,663. The implicit interest rate is 12%. Prepare Samson’s journal entries for (a) the Jan. 1 issuance and (b) the Dec. 31 recognition of interest.LO 5Zero-Interest-Bearing Notes(a) Cash 47,663 Notes payable 47,663(b) Interest expense 5,720 Notes payable 5,720 ($47,663 x 12%) LO 5 Explain the accounting for long-term notes payable.Zero-Interest-Bearing NotesBE14-10: Samson Corporation issued a 4-year, $75,000, zero-interest-bearing note to Brown Company on January 1, 2011, and received cash of $47,663. The implicit interest rate is 12%. Prepare Samson’s journal entries for (a) the Jan. 1 issuance and (b) the Dec. 31 recognition of interest.Interest-Bearing NotesBE14-11: McCormick Corporation issued a 4-year, $40,000, 5% note to Greenbush Company on Jan. 1, 2011, and received a computer that normally sells for $31,495. The note requires annual interest payments each Dec. 31. The market rate of interest is 12%. Prepare McCormick’s journal entries for (a) the Jan. 1 issuance and (b) the Dec. 31 interest.LO 5Interest-Bearing Notes(a) Cash 31,495 Notes payable 31,495Interest expense 3,779 Cash 2,000 Notes payable 1,779LO 5Notes Issued for Property, Goods, or ServicesSpecial Notes Payable SituationsLO 5 Explain the accounting for long-term notes payable.No interest rate is stated, orThe stated interest rate is unreasonable, orThe face amount is materially different from the current cash price for the same or similar items or from the current fair value of the debt instrument.When exchanging the debt instrument for property, goods, or services in a bargained transaction, the stated interest rate is presumed to be fair unless:If a company cannot determine the fair value of the property, goods, services, or other rights, and if the note has no ready market, the company must approximate an applicable interest rate.Special Notes Payable SituationsLO 5 Explain the accounting for long-term notes payable.Choice of rate is affected by:Prevailing rates for similar instruments. Factors such as restrictive covenants, collateral, payment schedule, and the existing prime interest rate.Choice of Interest RatesSpecial Notes Payable SituationsLO 5 Explain the accounting for long-term notes payable.Illustration: On December 31, 2011, Wunderlich Company issued a promissory note to Brown Interiors Company for architectural services. The note has a face value of $550,000, a due date of December 31, 2016, and bears a stated interest rate of 2 percent, payable at the end of each year. Wunderlich cannot readily determine the fair value of the architectural services, nor is the note readily marketable. On the basis of Wunderlich’s credit rating, the absence of collateral, the prime interest rate at that date, and the prevailing interest on Wunderlich’s other outstanding debt, the company imputes an 8 percent interest rate as appropriate in this circumstance.Special Notes Payable SituationsLO 5 Explain the accounting for long-term notes payable.Illustration 14-18Illustration 14-16Special Notes Payable SituationsLO 5 Explain the accounting for long-term notes payable.Wunderlich records issuance of the note on Dec. 31, 2011, in payment for the architectural services as follows.Building (or Construction in Process) 418,239 Notes Payable 418,239Special Notes Payable SituationsLO 5 Explain the accounting for long-term notes payable.Illustration 14-20Payment of first year’s interest and amortization of the discount.Interest expense 33,459 Notes Payable 22,459 Cash 11,000A promissory note secured by a document called a mortgage that pledges title to property as security for the loan.Mortgage Notes PayableLO 5 Explain the accounting for long-term notes payable.Most common form of long-term notes payable.Payable in full at maturity or in installments.Fixed-rate mortgage. Variable-rate mortgages.Reacquisition price > Net carrying amount = LossNet carrying amount > Reacquisition price = GainAt time of reacquisition, unamortized premium or discount must be amortized up to the reacquisition date.Extinguishment of Non-Current LiabilitiesLO 6 Describe the accounting for extinguishment of non-current liabilities.Extinguishment with Cash before MaturityIllustration: Evermaster bonds issued at a discount on January 1, 2011. These bonds are due in five years. The bonds have a par value of $100,000, a coupon rate of 8% paid semiannually, and were sold to yield 10%.Extinguishment of DebtIllustration 14-21Two years after the issue date on January 1, 2013, Evermaster calls the entire issue at 101 and cancels it.Extinguishment of DebtIllustration 14-22Evermaster records the reacquisition and cancellation of the bondsBonds payable 92,925Loss on extinguishment of bonds 6,075 Cash 101,000LO 6Creditor should account for the non-cash assets or equity interest received at their fair value.Debtor recognizes a gain equal to the excess of the carrying amount of the payable over the fair value of the assets or equity transferred.Extinguishment of Non-Current LiabilitiesLO 6 Describe the accounting for extinguishment of non-current liabilities.Extinguishment by Exchanging Assets or SecuritiesIllustration: Hamburg Bank loaned €20,000,000 to Bonn Mortgage Company. Bonn, in turn, invested these monies in residential apartment buildings. However, because of low occupancy rates, it cannot meet its loan obligations. Hamburg Bank agrees to accept from Bonn Mortgage real estate with a fair value of €16,000,000 in full settlement of the €20,000,000 loan obligation. The real estate has a carrying value of €21,000,000 on the books of Bonn Mortgage. Bonn (debtor) records this transaction as follows.Extinguishment of Non-Current LiabilitiesNote Payable to Hamburg Bank 20,000,000Loss on Disposition of Real Estate 5,000,000 Real Estate 21,000,000 Gain on Extinguishment of Debt 4,000,000LO 6Extinguishment of Non-Current LiabilitiesLO 6 Describe the accounting for extinguishment of non-current liabilities.Extinguishment with Modification of TermsCreditor may offer one or a combination of the following modifications:Reduction of the stated interest rate.Extension of the maturity date of the face amount of the debt.Reduction of the face amount of the debt.Reduction or deferral of any accrued interest.Extinguishment of Non-Current LiabilitiesLO 6 Describe the accounting for extinguishment of non-current liabilities.Illustration: On December 31, 2010, Morgan National Bank enters into a debt modification agreement with Resorts Development Company, which is experiencing financial difficulties. The bank restructures a $10,500,000 loan receivable issued at par (interest paid to date) by:Reducing the principal obligation from $10,500,000 to $9,000,000;Extending the maturity date from December 31, 2010, to December 31, 2014; andReducing the interest rate from the historical effective rate of 12 percent to 8 percent. Given Resorts Development’s financial distress, its market-based borrowing rate is 15 percent.Extinguishment of Non-Current LiabilitiesLO 6 Describe the accounting for extinguishment of non-current liabilities.IFRS requires the modification to be accounted for as an extinguishment of the old note and issuance of the new note, measured at fair value.Illustration 14-23Extinguishment of Non-Current LiabilitiesLO 6 Describe the accounting for extinguishment of non-current liabilities.The gain on the modification is $3,298,664, which is the difference between the prior carrying value ($10,500,000) and the fair value of the restructured note, as computed in Illustration 14-23 ($7,201,336). Resorts Development makes the following entry to record the modification.Note Payable (Old) 10,500,000 Gain on Extinguishment of Debt 3,298,664 Note Payable (New) 7,201,336Extinguishment of Non-Current LiabilitiesLO 6 Describe the accounting for extinguishment of non-current liabilities.Amortization schedule for the new note.Illustration 14-24Fair Value OptionLO 7 Describe the accounting for the fair value option.Companies have the option to record fair value in their accounts for most financial assets and liabilities, including bonds and notes payable. The IASB believes that fair value measurement for financial instruments, including financial liabilities, provides more relevant and understandable information than amortized cost.Fair Value OptionLO 7 Describe the accounting for the fair value option.Non-current liabilities are recorded at fair value, with unrealized holding gains or losses reported as part of net income.Fair Value MeasurementIllustrations: Edmonds Company has issued €500,000 of 6 percent bonds at face value on May 1, 2010. Edmonds chooses the fair value option for these bonds. At December 31, 2010, the value of the bonds is now €480,000 because interest rates in the market have increased to 8 percent.Bonds Payable 20,000 Unrealized Holding Gain or Loss—Income 20,000Off-balance-sheet financing is an attempt to borrow monies in such a way to prevent recording the obligations.Off-Balance-Sheet FinancingLO 8 Explain the reporting of off-balance-sheet financing arrangements.Different Forms:Non-Consolidated SubsidiarySpecial Purpose Entity (SPE)Operating LeasesNote disclosures generally indicate the nature of the liabilities, maturity dates, interest rates, call provisions, conversion privileges, restrictions imposed by the creditors, and assets designated or pledged as security.Fair value of the debt should be discloses.Must disclose future payments for sinking fund requirements and maturity amounts of long-term debt during each of the next five years.LO 9 Indicate how to present and analyze non-current liabilities.Presentation and AnalysisPresentation of Non-Current LiabilitiesAnalysis of Non-Current LiabilitiesTwo ratios that provide information about debt-paying ability and long-run solvency are:Total debtTotal assets Debt to total assets =The higher the percentage of debt to total assets, the greater the risk that the company may be unable to meet its maturing obligations.1.Presentation and AnalysisLO 9 Indicate how to present and analyze non-current liabilities.Analysis of Long-Term DebtTwo ratios that provide information about debt-paying ability and long-run solvency are:Income before income taxes and interest expenseInterest expense Times interest earned =Indicates the company’s ability to meet interest payments as they come due.2.Presentation and AnalysisLO 9 Indicate how to present and analyze non-current liabilities.Illustration: Novartis has total liabilities of $27,862 million, total assets of $78,299 million, interest expense of $290 million, income taxes of $1,336 million, and net income of $8,233 million. We compute Novartis’s debt to total assets and times interest earned ratios as shownIllustration 14-28Presentation and AnalysisLO 9 Indicate how to present and analyze non-current liabilities.IFRS requires that the current portion of long-term debt be classified as current unless an agreement to refinance on a long-term basis is completed before the reporting date. U.S. GAAP requires companies to classify such a refinancing as current unless it is completed before the financial statements are issued. Both IFRS and U.S. GAAP require the best estimate of a probable loss. Under IFRS, if a range of estimates is predicted and no amount in the range is more likely than any other amount in the range, the “mid-point” of the range is used to measure the liability. In U.S. GAAP, the minimum amount in a range is used.U.S. GAAP uses the term contingency in a different way than IFRS. A contingency under U.S. GAAP may be reported as a liability under certain situations. IFRS does not permit a contingency to be recorded as a liability. IFRS uses the term provisions to discuss various liability items that have some uncertainty related to timing or amount. U.S. GAAP generally uses a term like estimated liabilities to refer to provisions.Both IFRS and U.S. GAAP prohibit the recognition of liabilities for future losses. In general, restructuring costs are recognized earlier under IFRS.IFRS and U.S. GAAP are similar in the treatment of environmental liabilities However, the recognition criteria for environmental liabilities are more stringent under U.S. GAAP: Environmental liabilities are not recognized unless there is a present legal obligation and the fair value of the obligation can be reasonably estimated.IFRS requires that debt issue costs are recorded as reductions in the carrying amount of the debt. Under U.S. GAAP, companies record these costs in a bond issuance cost account and amortize these costs over the life of the bonds.U.S. GAAP uses the term troubled debt restructurings and develops recognition rules related to this category. IFRS generally assumes that all restructurings should be considered extinguishments of debt.Copyright © 2011 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.Copyright