C H A P T E R

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11

• C H A P T E R

Long-Term Debt Financing
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Learning Objective 1

• Use present value concepts to measure long-term
  liabilities.

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Define Long-Term Liabilities
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Accounting forLong-Term Liabilities

• Measurement and recording of long-term
  liabilities are based on the time value of money
  concept.

If money can earn 10 per year, 100 to be
received 1 year from now is approximately equal
to 90.91 received today.
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Present and FutureValue Tables

• Present Value Table
• Locate the number of periods in the left column
  and the interest rate in the row at the top of
  the table.
  
• This intersection is the factor representing the
  present value of 1.
  
• Discountingpresent value amount is the amount
  that could be paid today to satisfy the
  obligation.

Future Value Table Locate the number of periods i
n the left column and the interest rate in the
row at the top of the table. This intersection is
the factor representing the future value of 1.
Compoundingthe frequency with which interest is
added to the principal.
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Present Value
Present value of 100 paid in 5 years discounted
at 10 percent.
PV 62.09
90.90
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Future Value
Future value of 100 today compounded for 5 years
at 10 percent.
FV 161.05
110
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Value Table Future Value
Joan invested 2,000 for 3 years at 12 percent,
compounded annually. Using the table below, what
is the future value of the 2,000?
Periods 6 8 10 12
3 1.1910 1.2597 1.3310 1.4049
4 1.2625 1.3605 1.4641 1.5735
5 1.3382 1.4693 1.6105 1.7623
6 1.4185 1.5869 1.7716 1.9738
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Value Table Future Value
Joan invested 2,000 for 3 years at 12 percent,
compounded semiannually. Using the table below,
what is the future value of the 2,000?
Periods 6 8 10 12
3 1.1910 1.2597 1.3310 1.4049
4 1.2625 1.3605 1.4641 1.5735
5 1.3382 1.4693 1.6105 1.7623
6 1.4185 1.5869 1.7716 1.9738
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Computing the Interest RateProvide the
Appropriate Formula.
Interest rate per compounding period
Number of interest periods
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Define Annuities

• Annuity
• Present Value of an Annuity

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Value Tables Annuity
Joan is paid 8,000 a year for 8 years at 10
percent interest per year. Using the table
below, what is the present value of the annuity?
Periods 6 8 10 12
7 5.5824 5.2064 4.8684 4.5683
8 6.2098 5.7466 5.3349 4.9676
9 6.8017 6.2469 5.7590 5.3282
10 7.3601 6.7101 6.1446 5.6502
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Learning Objective 2

• Account for long-term liabilities, including
  notes payable and mortgages payable.

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Time Line ofBusiness Issues
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Example Interest-Bearing Notes
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Example Interest-Bearing Notes
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What is a Mortgage Payable?
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Example Mortgages Payable
On January 1, 2006, Blue Bird Corp. borrowed
500,000 to acquire a new building. The building
was signed as collateral for the 30-year, 7
percent loan. Payments of 3,326.51 are to be
made monthly. What are the January 2006 entries?
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Mortgages Payable
A mortgage amortization schedule shows the
breakdown between interest and principal for each
payment over the life of a mortgage.
Monthly Principal Interest Mo
rtgage Month Payment Paid Pa
id Balance 1 3,326.51 409
.84 2,916.67 499,590.16 2 3,326.51
412.23 2,914.28 499,177.93
3 3,326.51 414.64 2,911.87
498,763.29 4 3,326.51 417.06
2,909.45 498,346.23 5 3,326.51 41
9.49 2,907.02 497,926.74
6 3,326.51 421.94 2,904.57
497,504.80
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Learning Objective 3

• Account for capital lease obligations and
  understand the significance of operating leases
  being excluded from the balance sheet.

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Lease ObligationsMatch the Following Terms.

• The party that is granted the right to use
  property under the terms of a lease.
  
• The owner of property that is rented (leased) to
  another party.
  
• A simple short-term rental agreement.
• A leasing transaction that is recorded as a
  purchase by the lessee.
  
• A contract that specifies the terms under which
  the owner of an asset agrees to transfer the
  right to use the asset to another party.

Lessor Operating Lease Lease Lessee Capital Le
ase
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Classifying Leases

• If the lease is cancelable or does not meet any
  of the four requirements, is it an operating
  lease?

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Example Lease Obligations
On January 1, 2006, The Cockatoo Company leased a
computer. The lease requires annual payments of
5,000 for 8 years. The applicable interest rate
is 12 percent. How is the lease recorded? What
is the December 31, 2006 entry for interest
expense?
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Learning Objective 4

• Account for bonds, including the original
  issuance, the payment of interest, and the
  retirement of bonds.

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Define These Types of Bonds
Bond Unsecured Bonds (Debentures) Secu
red Bonds
Coupon (Bearer) Bonds
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Types of Bonds Matching

• Bonds that mature in one lump sum on a specified
  future date.
  
• Bonds that mature in a series of installments at
  specified future dates.
  
• Bonds for which the issuer reserves the right to
  pay the obligation before its maturity date.
  
• Bonds that can be traded for, or converted to,
  other securities after a specified period of
  time.
  
• The names and addresses of the bondholders are
  kept on file by the issuing company.
  

Serial Bonds Convertible Bonds Term Bonds Calla
ble Bonds
Registered Bonds
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Discuss These Types of Bonds
Zero-Coupon Bonds Junk Bonds
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Characteristics of Bonds Match Correctly.
A contract between a bond issuer and a bond
purchaser that specifies the terms of a bond.
The amount that will be paid on a bond at the
maturity date. The date at which a bond principal
or face amount becomes payable.
A contract between a bond issuer and a bond
purchaser that specifies the terms of a bond.
The amount that will be paid on a bond at the
maturity date. The date at which a bond principal
or face amount becomes payable.
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How Do You Determine Issuance Price?
Price should equal Market rate (effective
rate or yield rate) of interest

Stated rate of interest
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Determining Issuance Price Correctly Define Each
Term
Face Value Bond Discount Bond Premium
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Characteristics of Bonds Complete the Chart
Market Rate
Bond Sold at
Bond Stated Interest Rate 10
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Example Bond Issued at Face Value
Falcon Company agreed to issue 5-year, 500,000
bonds and pay 10 percent interest, compounded
semiannually. Assume the effective and stated
rates are equal. Calculate the issue price.
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Example Bond Issuedat a Discount
Falcon Company agreed to issue 5-year, 500,000
bonds and pay 10 percent interest, compounded
semiannually. Assume the effective rate is 12
percent. Calculate the issue price of the bonds.
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Example Bond Issuedat a Premium
Falcon Company agreed to issue 5-year, 500,000
bonds and pay 10 percent interest, compounded
semiannually. Assume the effective rate is 8
percent. Calculate the issue price of the bonds.
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Example Accounting for Bonds Payable
On January 1, 2006, Falcon Company agreed to
issue 5-year, 500,000 bonds and pay 10 percent
interest, compounded semiannually. Assume the
effective rate is 10 percent. What entry is
needed to record the liability?
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Example Accounting for Bonds Payable
On January 1, 2006, Falcon Company agreed to
issue 5-year, 500,000 bonds and pay 10 percent
interest, compounded semiannually. Assume the
effective rate is 10 percent. What entry is
needed to record the first interest payment?
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Example Bond Retirements at Maturity
On January 1, 2006, Falcon Company agreed to
issue 5-year, 500,000 bonds and pay 10 percent
interest, compounded semiannually. Assume the
effective rate is 10 percent. What entry is
needed to record the retirement of the bond on
January 1, 2011?
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Example Bond Retirements Before Maturity
The Great Owl Company issued 200,000, 14 percent
bonds, which are now selling for 107 and are
callable at 110. The bonds were issued at face
value. If the company decides to call the bonds,
what entry is needed?
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Learning Objective 5

• Use debt-related ratios to determine the degree
  of a companys financial leverage and its ability
  to repay loans

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Define Debt Ratio
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Define Debt-to-Equity Ratio
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Times Interest Earned Ratio
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Expanded MaterialLearning Objective 6

• Amortize bond discounts and bond premiums using
  either the straight-line method or the
  effective-interest method.

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Define the Two Bond Premium/Discount Amortization
Methods

• Straight-line Method
• Effective-interest Method

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Example Bond Issuedat a Discount
On January 1, 2006, The Ostrich Company agreed to
issue 10-year, 200,000 bonds and pay 10 percent
interest, compounded semiannually. The company
received 196,000 for the bonds. Make the entry
to record the issuance of the bonds.
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Example Bond Issuedat a Discount
On January 1, 2006, The Ostrich Company agreed to
issue 10-year, 200,000 bonds and pay 10 percent
interest, compounded semiannually. Using
straight-line amortization, what entry is made
for the interest payment on June 30, 2006?
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Example Bond Issuedat a Discount
On January 1, 2006, The Ostrich Company agreed to
issue 10-year, 200,000 bonds and pay 10 percent
interest, compounded semiannually. Using
straight-line amortization, what adjusting entry
is needed on December 31, 2006?
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Example Bond Issuedat a Discount
On January 1, 2006, The Ostrich Company agreed to
issue 10-year, 200,000 bonds and pay 10 percent
interest, compounded semiannually. What entry is
necessary to retire the debt after 10 years?
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Example Bond Issuedat a Premium
On January 1, 2006, The Parrot Company agreed to
issue 10-year, 200,000 bonds and pay 10 percent
interest, compounded semiannually. The company
received 210,000 for the bonds. Make the entry
to record the issuance of the bonds.
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Example Bond Issuedat a Premium
On January 1, 2006, The Parrot Company agreed to
issue 10-year, 200,000 bonds and pay 10 percent
interest, compounded semiannually. The company
received 210,000 for the bonds. Using
straight-line amortization, what entry is made
for the interest payment on June 30, 2006?
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Example Bond Issuedat a Premium
On January 1, 2006, The Parrot Company agreed to
issue 10-year, 200,000 bonds and pay 10 percent
interest, compounded semiannually. The company
received 210,000 for the bonds. Using
straight-line amortization, what entry is needed
on December 31, 2006?
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Example Bond Issuedat a Premium
On January 1, 2006, The Parrot Company agreed to
issue 10-year, 200,000 bonds and pay 10 percent
interest, compounded semiannually. The company
received 210,000 for the bonds. What entry is
necessary to retire the debt after 10 years?
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Effective-Interest Method
The Woodpecker Company issued a 1,000, 8 percent
bond. The market rate was 7 percent at the time
of issuance. Create an effective-interest table.
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Chapter 11 Complete