Kế toán tài chính - Chương 14: Long - Term liabilities

C H A P T E R 14LONG-TERM LIABILITIESIntermediate Accounting13th 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.Describe the accounting for the extinguishment of debt.Explain the accounting for long-term notes payable.Explain the reporting of off-balance-sheet financing arrangements.Indicate how to present and analyze long-term debt.Learning ObjectivesBonds PayableLong-Term Notes PayableReporting and Analyzing Long-Term DebtIssuing bondsTypes and ratingsValuationEffective-interest methodCosts of issuingExtinguishmentNotes issued at face valueNotes not issued at face valueSpecial situationsMortgage notes payableOff-balance-sheet financingPresentation and analysisLong-Term LiabilitiesBonds PayableLong-term debt consists of probable future sacrifices of economic benefits 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 payableNotes 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. Purpose is to borrow 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 bonds, Commodity-backed bonds, Deep-discount bonds (Zero-interest debenture bonds),Registered bonds and bearer or coupon bonds,Income and Revenue bonds.Types and Ratings of BondsLO 2 Identify various types of bond issues.Corporate bond listings would look like those below.Valuation of Bonds – Discount and PremiumLO 3 Describe the accounting valuation for bonds at date of issuance.Between the time the company sets the terms and the time it issues the bonds, the market conditions and the financial position of the issuing corporation may change significantly. Such changes affect the marketability of the bonds and thus their selling price.The investment community values a bond at the present value of its expected future cash flows, which consist of (1) interest and (2) principal.Interest RatesStated, coupon, or nominal rate = The interest rate written in the terms of the bond indenture. Market rate or effective yield = rate that provides an acceptable return on an investment commensurate with the issuer’s risk characteristics. Rate of interest actually earned by the bondholders.Valuation of Bonds – Discount and PremiumLO 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?(Stated rate x Face Value of the bond)How do you calculate the amount of interest that is actually recorded as interest expense by the issuer of the bonds?(Market rate x Carrying Value of the bond)Valuation of Bonds – Discount and PremiumLO 3 Describe the accounting valuation for bonds at date of issuance.1- Depends on Market Rate of interest2- Computation of selling price: - PV of maturity value, plus - PV of interest payments, at what rate? - Market rate of interest3- Semi-annual interest paying bonds: - Require doubling the periods - Halving the interest rateValuation of Bonds – Discount and PremiumLO 3 Describe the accounting valuation for bonds at date of issuance.Calculating the Selling Price of a BondBonds Sold AtMarket Interest6%8%10%PremiumFace ValueDiscountValuation of Bonds – Discount and PremiumLO 3 Describe the accounting valuation for bonds at date of issuance.Assume Stated Rate of 8%Illustration: Three year bonds are issued at face value of $100,000 on Jan. 1, 2011, with a stated interest rate of 8%. Interest paid annually on Dec. 31. Calculate the issue price of the bonds, market interest rate of 8%.LO 3 Describe the accounting valuation for bonds at date of issuance.Market Rate 8% (PV for 3 periods at 8%)Bonds Issued at ParSolution on notes pageIllustration: Three year bonds are issued at face value of $100,000 on Jan. 1, 2011, a stated interest rate of 8%, and market rate of 8%. Bonds Issued at ParLO 3 Describe the accounting valuation for bonds at date of issuance.Illustration: Stated rate = 8%. Market rate = 8%. Bonds Issued at ParLO 3 Describe the accounting valuation for bonds at date of issuance.Journal entries for 2011:1/1/11 Cash 100,000 Bonds payable 100,00012/31/11 Interest expense 8,000 Cash 8,000Illustration: Three year bonds are issued at face value of $100,000 on Jan. 1, 2011, and a stated interest rate of 8%. Calculate the issue price of the bonds assuming a market interest rate of 10%.Bonds Issued at a DiscountLO 4 Apply the methods of bond discount and premium amortization.Market Rate 10% (PV for 3 periods at 10%)Solution on notes pageIllustration: Three year bonds are issued at face value of $100,000 on Jan. 1, 2011, a stated interest rate of 8%, and market rate of 10%. ** roundingBonds Issued at a DiscountLO 4 Apply the methods of bond discount and premium amortization.Illustration: Stated rate = 8%. Market rate = 10%. 1/1/11 Cash 95,027 Discount on bonds payable 4,973 Bonds payable 100,00012/31/12 Interest expense 9,503 Discount on bonds payable 1,503 Cash 8,000Bonds Issued at a DiscountLO 4 Apply the methods of bond discount and premium amortization.Journal entries for 2011:Illustration: Three year bonds are issued at face value of $100,000 on Jan. 1, 2011, and a stated interest rate of 8%. Calculate the issue price of the bonds assuming a market interest rate of 6%.Market Rate 6% (PV for 3 periods at 6%)Bonds Issued at a PremiumLO 4 Apply the methods of bond discount and premium amortization.Solution on notes pageIllustration: Three year bonds are issued at face value of $100,000 on Jan. 1, 2011, a stated interest rate of 8%, and market rate of 6%. Bonds Issued at a PremiumLO 4 Apply the methods of bond discount and premium amortization.Illustration: Stated rate = 8%. Market rate = 6%. Journal entries for 2011:1/1/11 Cash 105,346 Premium on bonds payable 5,346 Bonds payable 100,00012/31/11 Interest expense 6,321 Premium on bonds payable 1,679 Cash 8,000Bonds Issued at a PremiumLO 4 Apply the methods of bond discount and premium amortization.Buyers 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, purchasers will receive the full six months’ interest payment.Bonds Issued between Interest DatesLO 4 Apply the methods of bond discount and premium amortization.Valuation of Bonds – Discount and PremiumLO 4 Apply the methods of bond discount and premium amortization.Valuation of Bonds – Discount and PremiumIllustration: On March 1, 2010, KC Corporation issues 10-year bonds, dated January 1, 2010, with a par value of $800,000. These bonds have an annual interest rate of 6 percent, payable semiannually on January 1 and July 1. Prepare the journal entry to record the bond issuance at par plus accrued interest.Cash 808,000 Bonds Payable 800,000 Bond Interest Expense 8,000($800,000 x .06 x 2/12) = $8,000Valuation of Bonds – Discount and PremiumIllustration: On July 1, 2010, four months after thedate of purchase, KC pays the purchaser six months’ interest. KC makes the following entry on July 1, 2010.Bond Interest Expense 24,000 Cash 24,000($800,000 x .06 x 6/12) = $24,000Bond Interest ExpenseDebit / Dr. Credit / Cr. $24,000$8,000 $16,000Discount on bonds payable is a liability valuation account, that reduces the face amount of the related liability (contra-account).Classification of Discount and PremiumLO 4 Apply the methods of bond discount and premium amortization.Valuation of Bonds – Discount and PremiumPremium on bonds payable is a liability valuation account, that adds to the face amount of the related liability (adjunct account). Unamortized bond issue costs are treated as a deferred charge and amortized over the life of the debt.LO 4 Apply the methods of bond discount and premium amortization.Costs of Issuing BondsExtinguishment before Maturity DateReacquisition price > Net carrying amount = LossNet carrying amount > Reacquisition price = GainAt time of reacquisition, unamortized premium or discount, and any costs of issue applicable to the bonds, must be amortized up to the reacquisition date.Extinguishment of DebtLO 5 Describe the accounting for the extinguishment of debt.Illustration: Three year 8% bonds of $100,000 issued on Jan. 1, 2011, are recalled at 105 on Dec. 31, 2012. Expenses of recall are $2,000. Market interest on issue date was 8%. Extinguishment of DebtLO 5 Describe the accounting for the extinguishment of debt.Account Balances at Dec. 31, 2012: Bonds payable = $98,183 Discount on bonds payable ($4,973–1,503-1,653) = 1,817Illustration: Three year 8% bonds of $100,000 issued on Jan. 1, 2011, are recalled at 105 on Dec. 31, 2012. Expenses of recall are $2,000. Market interest on issue date was 8%. Extinguishment of DebtLO 5 Describe the accounting for the extinguishment of debt.Journal entry at Dec. 31, 2011: Bonds payable 100,000 Loss on extinguishment 8,817 Cash 107,000 Discount on bonds payable 1,817Reacquisition price = $105,000 + 2,000 = $107,000Long-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 6 Explain the accounting for long-term notes payable.BE14-12: 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 6 Explain the accounting for long-term notes payable.Zero-Interest-Bearing NotesIssuing 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 6 Explain the accounting for long-term notes payable.BE14-13: 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 6 Explain the accounting for long-term notes payable.Zero-Interest-Bearing Notes(a) Cash 47,663 Discount on notes payable 27,337 Notes payable 75,000(b) Interest expense 5,720 Discount on notes payable 5,720 ($47,663 x 12%) LO 6 Explain the accounting for long-term notes payable.Zero-Interest-Bearing NotesBE14-13: 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 NotesBE14-14: 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.Notes Issued at Face ValueLO 6 Explain the accounting for long-term notes payable.(a) Cash 31,495 Discount on notes payable 8,505 Notes payable 40,000Interest expense 3,779 Cash 2,000 Discount on notes payable 1,779Notes Issued for Property, Goods, and ServicesWhen exchanging the debt instrument for property, goods, or services in a bargained transaction, the stated interest rate is presumed to be fair unless:Special Notes Payable SituationsLO 6 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 market value of the debt instrument.Choice of Interest RatesIf 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 impute an interest rate.Special Notes Payable SituationsLO 6 Explain the accounting for long-term notes payable.The 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.Special Notes Payable SituationsLO 6 Explain the accounting for long-term notes payable.Illustration: On December 31, 2010, 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, 2015, 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 6 Explain the accounting for long-term notes payable.Illustration 14-15Illustration 14-16Special Notes Payable SituationsLO 6 Explain the accounting for long-term notes payable.Wunderlich records issuance of the note in payment for the architectural services as follows.Building (or Construction in Process) 418,239Discount on Notes Payable 131,761 Notes Payable 550,000Special Notes Payable SituationsLO 6 Explain the accounting for long-term notes payable.Illustration 14-17Payment of the first year’s interest and amortization of the discount as follows.Interest expense 33,459 Discount on 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 6 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.An attempt to borrow monies in such a way to prevent recording the obligations.Off-Balance-Sheet FinancingLO 7 Explain the reporting of off-balance-sheet financing arrangements.Different Forms:Non-Consolidated SubsidiarySpecial Purpose Entity (SPE)Operating LeasesPresentation of Long-Term DebtNote 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.Must disclose future payments for sinking fund requirements and maturity amounts of long-term debt during each of the next five years.Presentation and Analysis of Long-Term DebtLO 8 Indicate how to present and analyze long-term debt.Analysis of Long-Term DebtTwo ratios that provide information about debt-paying ability and long-run solvency are:Total debtTotal assets Debt to total assets =LO 8 Indicate how to present and analyze long-term debt.Presentation and Analysis of Long-Term DebtThe higher the percentage of debt to total assets, the greater the risk that the company may be unable to meet its maturing obligations.1.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 =LO 8 Indicate how to present and analyze long-term debt.Presentation and Analysis of Long-Term DebtIndicates the company’s ability to meet interest payments as they come due.2.LO 8 Indicate how to present and analyze long-term debt.Presentation and Analysis of Long-Term DebtIllustration: Best Buy has total liabilities of $7,369 million, total assets of $13,570 million, interest expenseof $31 million, income taxes of $752 million, and net income of $1,377 million. We compute Best Buy’s debt to total assets and times interest earned ratiosIllustration 14-21Solution on notes pageDiversity in PracticeSimilar to U.S. practice, iGAAP requires that companies present current and noncurrent liabilities on the face of the balance sheet, with current liabilities generally presented in order of liquidity.Under iGAAP, the measurement of a provision related to a contingency is based on the best estimate of the expenditure required to settle the obligation. 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.Diversity in PracticeBoth GAAPs prohibit the recognition of liabilities for future losses. iGAAP and U.S. GAAP are similar in the treatment of asset retirement obligations (AROs). However, the recognition criteria for an ARO are more stringent under U.S. GAAP.iGAAP and U.S. GAAP are similar in their treatment of contingencies. However, under U.S. GAAP, contingent assets for insurance recoveries are recognized if probable; iGAAP requires the recovery be “virtually certain” before recognition of an asset is permitted.Usual Progression in Troubled-Debt SituationsIllustration 14A-1A troubled-debt restructuring involves one of two basic types of transactions:1. Settlement of debt at less than its carrying amount.2. Continuation of debt with a modification of terms.LO 9 Describe the accounting for a debt restructuring.LO 9 Describe the accounting for a debt restructuring.Settlement of DebtCan involve either a transfer of noncash assets (real estate, receivables, or other assets) or the issuance of the debtor’s stock.Creditor should account for the noncash assets or equity interest received at their fair value.LO 9 Describe the accounting for a debt restructuring.Illustration (Transfer of Assets): American City Bank loaned $20,000,000 to Union Mortgage Company. Union Mortgage cannot meet its loan obligations. American City Bank agrees to accept from Union 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 Union Mortgage. American City Bank (creditor) records this transaction as follows.Real Estate 16,000,000Allowance for Doubtful Accounts 4,000,000Note Receivable from Union Mortgage 20,000,000LO 9 Describe the accounting for a debt restructuring.Illustration (Transfer of Assets): The bank records the real estate at fair value. Further, it makes a charge to the Allowancefor Doubtful Accounts to reflect the bad debt write-off.Union Mortgage (debtor) records this transaction as follows.Note Payable to American City Bank 20,000,000Loss on Disposition of Real Estate 5,000,000 Real Estate 21,000,000 Gain on Restructuring of Debt 4,000,000LO 9 Describe the accounting for a debt restructuring.Illustration (Granting an Equity Interest): American City Bank agrees to accept from Union Mortgage 320,000 sharesof common stock ($10 par) that has a fair value of $16,000,000, in full settlement of the $20,000,000 loan obligation. American City Bank (creditor) records this transaction as follows.Investment 16,000,000Allowance for Doubtful Accounts 4,000,000 Note Receivable from Union Mortgage 20,000,000LO 9 Describe the accounting for a debt restructuring.Illustration (Granting an Equity Interest): It records the stock as an investment at the fair value at the date of restructure.Union Mortgage (debtor) records this transaction as follows.Note Payable to American City Bank 20,000,000 Common stock 3,200,000 Additional paid-in capital 12,800,000 Gain on Restructuring of Debt 4,000,000LO 9 Describe the accounting for a debt restructuring.Modification of TermsA debtor’s serious short-run cash flow problems will lead it to request 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.LO 9 Describe the accounting for a debt restructuring.Illustration (Example 1—No Gain for Debtor): On December 31, 2009, Morgan National Bank enters into a debt restructuring 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, 2009, to December 31, 2013; andReducing the interest rate from 12% to 8%.LO 9 Describe the accounting for a debt restructuring.Schedule Showing Reduction of Carrying Amount of NoteIllustration 14A-2Notes Payable 356,056Interest Expense 363,944 Cash 720,000Dec. 31, 2010LO 9 Describe the accounting for a debt restructuring.Schedule Showing Reduction of Carrying Amount of NoteIllustration 14A-2Notes Payable 9,000,000 Cash 9,000,000Dec. 31, 2013LO 9 Describe the accounting for a debt restructuring.Creditor CalculationsIllustration 14A-3Morgan National Bank (creditor)Morgan National Bank records bad debt expense as followsBad Debt Expense 2,593,428 Allowance for Doubtful Accounts 2,593,428Creditor CalculationsIllustration 14A-4In subsequent periods, Morgan National Bank reports interest revenue based on the historical effective rate.Cash 720,000Allowance for Doubtful Accounts 228,789 Interest Revenue 948,789Dec. 10, 2010Creditor CalculationsThe creditor makes a similar entry (except for different amounts debited to Allowance for Doubtful Accounts and credited to Interest Revenue) each year until maturity. Atmaturity, the company makes the following entry.Cash 9,000,000Allowance for Doubtful Accounts 1,500,000 Notes receivable 10,500,000Dec. 10, 2013LO 9 Describe the accounting for a debt restructuring.LO 9 Describe the accounting for a debt restructuring.Illustration (Example 2—Gain for Debtor): Assume the facts in the previous example except that Morgan National Bank reduces the principal to $7,000,000 (and extends the maturity date to December 31, 2013, and reduces the interest from 12% to 8%). The total future cash flow is now $9,240,000 ($7,000,000 of principal plus $2,240,000 of interest), which is $1,260,000 ($10,500,000 $9,240,000) less than the pre-restructure carrying amount of $10,500,000. Under these circumstances, Resorts Development (debtor) reduces the carrying amount of its payable $1,260,000 and records a gain of $1,260,000. On the other hand, Morgan National Bank (creditor) debits its Bad Debt Expense for $4,350,444.LO 9 Describe the accounting for a debt restructuring.Illustration (Example 2—Gain for Debtor): Morgan National Bank (creditor) debits its Bad Debt Expense for $4,350,444.Illustration 14A-5Illustration 14A-6LO 9 Describe the accounting for a debt restructuring.Illustration (Example 2—Gain for Debtor): Morgan National reports interest revenue the same as the previous example—Illustration 14A-7LO 9 Describe the accounting for a debt restructuring.Illustration (Example 2—Gain for Debtor): Accounting for periodic interest payments and final principal payment.Illustration 14A-8Copyright © 2009 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. 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