Kế toán, kiểm toán - Long - Term liabilities

Long-termLiabilitiesBondsWritten promise to pay a specific sum of money on a speciific future datePurchaser is bondholderReceives Bond certificateClassification of BondsRegistered - issued in name of holderSecured - assets pledged as securityDebenture (unsecured) - based on general creditSerial - mature in installmentsCallable - corporation has option of retiringBonds Compared to StockBondholders are creditorsBonds a liabilityInterest is fixed chargeInterest is expenseInterest tax deductibleNo votingStockholders are ownersStock is equityDividends not fixed chargesDividends not expenseDividends not tax deductibleVotingFinancial LeverageBorrowed money invested within business to earn a higher rate than borrowing costWhen positive financial leverage occurs, use of bonds will produce higher EPS than financing same investment with stockUse of bonds will also produce higher amount available for reinvestmentBond TermsFace valueThe principal of the bond payable at maturityStated interest rate The rate multiplied by face value to get periodic cash interest paymentTermTime to maturityWhy Bonds Sell at Discount or PremiumWhen market interest rate on comparable grade bonds is higher or lower than the stated rate,Why Bonds Sell at Discount or PremiumWhen market interest rate on comparable grade bonds is higher or lower than the stated rate, investors will adjust the purchase price of the bond so that they earn the desired market interest rateWhy Bonds Sell at Discount or PremiumWhy Bonds Sell at Discount or PremiumWhen market interest rate on comparable grade bonds is higher or lower than the stated rate, investors will adjust the purchase price of the bond so that they earn the desired market interest rateIssuing price determines effective or yield rateWhy Bonds Sell at Discount or PremiumIf the market rate is higher than stated rate, investors will offer less than face valueDifference between price paid and face value is discountEffective interest rate is higher than stated interest rateWhy Bonds Sell at Discount or PremiumIf market rate is lower than stated rate, investors will offer more than face valueDifference between price paid and face value is premiumEffective interest rate is lower than stated interest rateSales Price of BondBond promises two future cash flowsPeriodic interest paymentsPrincipal at maturityPrice of bond today is the sum of the present value of these two future cash flows discounted at the interest rate the investor desires to earn (market rate)Calculation of Bond PriceAssume $100,000, 10%, 10 year bond, interest payable semiannually on 6/30 and 12/31, market interest rate 12%Since the market interest rate (12%) is higher than the stated interest rate (10%), the bond should sell at a discountCalculation of Bond PricePV of face amount (i=6%,n=20)$100,000 x 0.312 = $31,200PV of interest payments$5,000 x 11.470 = $57,350Price of bond = $88,550Issuance of BondsIncrease Cash for the proceeds of issuanceIncrease Bonds Payable for face valueIncrease Premium or Discount for the differenceAmortization of Premium or DiscountThe premium or discount is an adjustment to the interestTo record the proper interest expense, we must amortize the premium or discountTwo methodsStraight-line - constant amortizationEffective interest - constant effective rateRecording Interest Straight-LineDecrease Cash forFace amount x Stated rate X TimeDecrease Premium or Discount forPremium or Discount / Time to maturityIncrease Interest Expense for Sum of cash and amortizationRecording Interest Effective Interest MethodDecrease Cash forFace amount x Stated Rate x TimeIncrease Interest Expense forCarrying value x Effective Interest Rate x TimeDecrease Premium or Discount forThe difference between cash and interest expenseDiscount Amortization Example$10,000, 10%, 2 year bondInterest payable semiannuallyMarket interest rate 11%Issue price $9,822.50Discount Amortization Straight-LinePd Cash Exp Amort CV 0 9,822.501 500.00 544.38 44.38 9,866.882 500.00 544.38 44.38 9,911.263 500.00 544.38 44.38 9,955.644 500.00 544.38 44.36 10,000.00Proof of InterestFuture cash paymentsFace $10,000.00Interest 2,000.00Total $12,000.00Cash received 9,822.50Total interest $2,177.50Semiannual interest $2,177.50 / 4 = $544.38Discount Amortization Effective InterestPd Cash Exp Amort CV 0 9,822.501 500.00 540.24 40.24 9,862.742 500.00 542.45 42.45 9,905.193 500.00 544.79 44.79 9,949.984 500.00 547.25 47.25 *9,997.23 *rounding error Premium Amortization Example$10,000, 10%, 2 year bondInterest payable semiannuallyMarket interest rate 9%Issue price $10,184.00Premium Amortization Straight-LinePd Cash Exp Amort CV 0 10,184.001 500.00 454.00 46.00 10,138.002 500.00 454.00 46.00 10,092.003 500.00 454.00 46.00 10,046.004 500.00 454.00 46.00 10,000.00Proof of InterestFuture cash paymentsFace $10,000.00Interest 2,000.00Total $12,000.00Cash received 10,184.00Total interest $1,816.00Semiannual interest $1,816.00 / 4 = $454.00Premium Amortization Effective InterestPd Cash Exp Amort CV 0 10,184.001 500.00 458.28 41.72 10,142.282 500.00 456.40 43.60 10,098.683 500.00 454.44 45.56 10,053.124 500.00 452.39 47.61 *10,005.51 *rounding errorIssuance Between Interest DatesInterest since last interest payment date accrues to date of issuance at the stated rateProceeds of issuance include Market price of bondAccrued interestAccrued interest increases Interest PayableIssuance Between Interest DatesNext interest payment is for full 6 months and pays off Interest PayabeResulting interest expense is only for period since issuanceMortgage Notes PayableLong-term note with assignment of an interest in propertyMortgage paid in equal periodic installmentsEach payment includesInterest at specified rate on unpaid principalReduction of principal for difference between payment and interestAnalyzing InformationIs the level of total debt manageable?Does it seem likely interest and principal payments can be met?Times Interest Earned ratioDebit ratioIf firm needs additional financing, would you recommend lending or investing in it?