Chap 14

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA

Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cnthia J. !oone, Ph.D., CPA
Winston "wok, Ph.D., CPA
Cha#ter $%
Long-Term Liabilities
McGraw-Hill/Irwin Copyright 2011 by The McGraw-Hill Companies, Inc !ll rights reser"e#
14 - 2
Bond &inan'in(
Bonds do not affect
owner control.
Bonds do not affect
owner control.
Interest on bonds is
tax deductible.
Interest on bonds is
tax deductible.
Bonds can increase
return on equity.
Bonds can increase
return on equity.
Advantages
Advantages

Bonds re)uire
Bonds re)uire
#ament o* both
#ament o* both
#eriodi' interest and
#ar +alue at maturit.
Bonds re)uire
Bonds re)uire
#ament o* both
#ament o* both
Bonds 'an de'rease
Bonds 'an de'rease
return on e)uit.
return on e)uit.
Bonds 'an de'rease
Bonds 'an de'rease
return on e)uit.
return on e)uit.
Disadvantages
Disadvantages

A1
14 - 3
Bond ,radin(
A1
Bonds are se'urities that 'an be #ur'hased or
sold in the se'urities markets. ,he ha+e a
market +alue whi'h is e-#ressed as a #er'ent
o* their #ar +alue. ,he 'losin( #ri'e indi'ates
that the IBM bond is bein( sold at $$../01 o*
*a'e +alue.
14 - 4
Bond
Certi*i'ate
Bond
Certi*i'ate
Bond Selling rice
!or"oration
Investors
Bond Issuan'es
P1
Transaction on t#e Bond Issue Date
14 - 5
Bond Interest ayments
!or"oration Investors
Bond Issue
Date
Bond Interest ayments
Interest ayment $ Bond ar %alue &
Stated Interest 'ate x Time
Interest ayment $ Bond ar %alue &
Stated Interest 'ate x Time
Bond Issuan'es
Transactions during t#e bond life
P1
14 - 6
Bond (ace %alue
!or"oration
Investors
Bond Issuan'es
Transaction on t#e )aturity Date
P1
14 - 7
Issuin( Bonds at Par
*n +an. ,- ./,,- a com"any issued t#e following bonds0
ar %alue0 12//-///
Stated Interest 'ate0 34
Interest Dates0 567/ and ,.67,
)aturity Date $ Dec. 7,- ./7/ 8./ years9
P1
14 - 8
$800,000 9% year =
$36,000
$800,000 9% year =
$36,000
On June 30, 2011, the issuer of the bond
pays the frst semiannual interest payment of
$36,000.
On June 30, 2011, the issuer of the bond
pays the frst semiannual interest payment of
$36,000.
P1
This entry is made every six months until
the bonds mature.
This entry is made every six months until
the bonds mature.
14 - 9
On December 31, 2030, the bonds mature
and the issuer of the bond pays face alue of
$!00,000 to the bondholders.
On December 31, 2030, the bonds mature
and the issuer of the bond pays face alue of
$!00,000 to the bondholders.
P1
14 - 10
Bond Dis'ount or Premium
P1
14 - 11

&ila issues bonds with the *ollowin( #ro+isions:

Par 2alue: 3$44,444
Par 2alue: 3$44,444

Issue Pri'e: .5.%0%1 o* #ar +alue

Stated Interest !ate: 61

Market Interest !ate: $41

Interest Dates: 5784 and $/78$

Bond Date: De'. 8$, /4$$

Maturit Date: De'. 8$, /4$8 9/ ears:


Par 2alue: 3$44,444
Par 2alue: 3$44,444






Issuin( Bonds at a Dis'ount
;
Bond will sell at a dis'ount.
P2
14 - 12
<n De'. 8$, /4$$, &ila should re'ord the bond issue.
<n De'. 8$, /4$$, &ila should re'ord the bond issue. <n De'. 8$, /4$$, &ila should re'ord the bond issue.
<n De'. 8$, /4$$, &ila should re'ord the bond issue.
"ar alue
$
100,000
$ash
proceeds

%6,&'&
Discount
$
3,'&6
($100,000 ) %6.&'&*
Contra=>iabilit Contra=>iabilit
A''ount A''ount
Contra=>iabilit Contra=>iabilit
A''ount A''ount
P2
14 - 13

?**e'ti+e Interest Amorti@ation
3.5,%0% A 01 B 3%,6/8 3.5,%0% A 01 B 3%,6/8
3$44,444 = 3/,C/8 B 3.C,/CC 3$44,444 = 3/,C/8 B 3.C,/CC
P2
14 - 14
Amorti@in( a Bond Dis'ount
P2
14 - 15

Adidas issues bonds with the *ollowin( #ro+isions:

Par 2alue: 3$44,444
Par 2alue: 3$44,444

Issue Pri'e: $48.0%51 o* #ar +alue

Stated Interest !ate: $/1






Par 2alue: 3$44,444
Par 2alue: 3$44,444






Issuin( Bonds at a Premium
;
Bond will sell at a #remium.
P3
14 - 16
Issuin( Bonds at a Premium
"ar alue
$
100,000
$ash proceeds

103,'&6 (
"remium
$
3,'&6
($100,000 ) 103.'&6*
AdDun't=>iabilit AdDun't=>iabilit
A''ount A''ount
AdDun't=>iabilit AdDun't=>iabilit
A''ount A''ount
<n De'. 8$, /4$$, Adidas will re'ord the bond issue as: <n De'. 8$, /4$$, Adidas will re'ord the bond issue as: <n De'. 8$, /4$$, Adidas will re'ord the bond issue as: <n De'. 8$, /4$$, Adidas will re'ord the bond issue as:
P3
14 - 17
Amorti@in( a Bond Premium
P3
14 - 18
Bond Pri'in(
P2
Cash <ut*lows related to Interest Paments
Cash <ut*lows *or #ar +alue at end o* Bond li*e
14 - 19


Par 2alue: 3$44,444
Par 2alue: 3$44,444

Issue Pri'e: E
Issue Pri'e: E







Par 2alue: 3$44,444
Par 2alue: 3$44,444

Issue Pri'e: E
Issue Pri'e: E





P2
14 - 20
Present 2alue o* a Dis'ount Bond
,o 'al'ulate Present 2alue, we need rele+ant interest rate ,o 'al'ulate Present 2alue, we need rele+ant interest rate
and number o* #eriods. and number o* #eriods.
Semiannual rate B 01 9Market rate $41 F /: Semiannual rate B 01 9Market rate $41 F /:
Semiannual #eriods B % 9Bond li*e / ears A /: Semiannual #eriods B % 9Bond li*e / ears A /:
,o 'al'ulate Present 2alue, we need rele+ant interest rate ,o 'al'ulate Present 2alue, we need rele+ant interest rate
and number o* #eriods. and number o* #eriods.
Semiannual rate B 01 9Market rate $41 F /: Semiannual rate B 01 9Market rate $41 F /:
Semiannual #eriods B % 9Bond li*e / ears A /: Semiannual #eriods B % 9Bond li*e / ears A /:
3$44,444 A 61 A G B 3%,444 3$44,444 A 61 A G B 3%,444 3$44,444 A 61 A G B 3%,444 3$44,444 A 61 A G B 3%,444
P2
14 - 21
Bond !etirement
!etirement o* the &ila bonds at maturit *or
3$44,444 'ash.
3$44,444 'ash.
3$44,444 'ash.
3$44,444 'ash.
Be'ause an dis'ount or #remium will be *ull amorti@ed at
maturit, the 'arrin( amount o* the bonds will be e)ual to #ar +alue.
P4
14 - 22
Bond !etirement
!etirement o* Bonds be*ore Maturit
!arrying Amount : 'etirement rice $ ;ain
!arrying Amount < 'etirement rice $ Loss
Assume that 3$44,444 o* 'allable bonds will be retired
on Jul $, /4$$, a*ter the *irst interest #ament. ,he
bond 'arrin( amount is 3$4%,044.,he bonds ha+e a
'all #remium o* 38,444.
Assume that 3$44,444 o* 'allable bonds will be retired
on Jul $, /4$$, a*ter the *irst interest #ament. ,he
bond 'arrin( amount is 3$4%,044.,he bonds ha+e a
'all #remium o* 38,444.
P4
14 - 23
Bond !etirement
B Con+ersion
<n Januar $, 3$44,444 #ar +alue bonds o* Con+erse, with a <n Januar $, 3$44,444 #ar +alue bonds o* Con+erse, with a
'arrin( amount o* 3$44,444, are 'on+erted to $0,444 'arrin( amount o* 3$44,444, are 'on+erted to $0,444
ordinar shares o* 3/ #ar +alue. ordinar shares o* 3/ #ar +alue.
<n Januar $, 3$44,444 #ar +alue bonds o* Con+erse, with a <n Januar $, 3$44,444 #ar +alue bonds o* Con+erse, with a
'arrin( amount o* 3$44,444, are 'on+erted to $0,444 'arrin( amount o* 3$44,444, are 'on+erted to $0,444
ordinar shares o* 3/ #ar +alue. ordinar shares o* 3/ #ar +alue.
$0,444 shares A 3/ #ar +alue #er share
$0,444 shares A 3/ #ar +alue #er share
P4
14 - 24
=ote )aturity
Date
Hote Paable
Hote Paable
Hote Paable
Hote Paable
!as#
!om"any Lender
=ote Date
When is the re#ament o* the #rin'i#al
When is the re#ament o* the #rin'i#al
and interest (oin( to be madeE
and interest (oin( to be madeE
>on(=,erm Hotes Paable
C1
14 - 25
=ote )aturity
Date
!om"any Lender
=ote Date
Sin(le Pament o*
Sin(le Pament o*
Prin'i#al #lus
Prin'i#al #lus
Interest
Interest
Sin(le Pament o*
Sin(le Pament o*
Prin'i#al #lus Interest
Prin'i#al #lus Interest
C1
14 - 26
=ote )aturity
Date
!om"any Lender
=ote Date
!e(ular Paments o* Prin'i#al #lus Interest
!e(ular Paments o* Prin'i#al #lus Interest
Paments either 'an be e)ual
#rin'i#al #aments #lus interest
or e)ual #aments.
'egular ayments of
rinci"al "lus Interest
C1
14 - 27
Installment Hotes
*n +anuary ,- ./,,- (og#og borrows 15/-/// from a ban> to
"urc#ase equi"ment. It signs an 24 installment note requiring 5
annual "ayments of "rinci"al "lus interest.
*n +anuary ,- ./,,- (og#og borrows 15/-/// from a ban> to
"urc#ase equi"ment. It signs an 24 installment note requiring 5
annual "ayments of "rinci"al "lus interest.
Com#ute the #eriodi' #ament b di+idin( the *a'e amount
o* the note b the #resent +alue *a'tor.
Com#ute the #eriodi' #ament b di+idin( the *a'e amount
o* the note b the #resent +alue *a'tor.
C1
14 - 28
Installment Hotes with ?)ual Paments
C1
14 - 29
Installment Hotes with ?)ual Paments
Let?s record t#e first "ayment made on December 7,-
./,, by (og#og to t#e ban>.
Let?s record t#e first "ayment made on December 7,-
./,, by (og#og to t#e ban>.
'efer bac> to t#e amorti@ation sc#edule to ma>e t#e
December 7,- ./,. "ayment on t#e note.
'efer bac> to t#e amorti@ation sc#edule to ma>e t#e
December 7,- ./,. "ayment on t#e note.
P5
14 - 30
Mort(a(e Hotes and Bonds
A legal agreement t#at #el"s "rotect t#e
lender if t#e borrower fails to ma>e t#e
required "ayments.
;ives t#e lender t#e rig#t to be "aid out of t#e
cas# "roceeds from t#e sale of t#e
borrower?s assets s"ecifically identified in
t#e mortgage contract.
A legal agreement t#at #el"s "rotect t#e
lender if t#e borrower fails to ma>e t#e
required "ayments.
;ives t#e lender t#e rig#t to be "aid out of t#e
cas# "roceeds from t#e sale of t#e
borrower?s assets s"ecifically identified in
t#e mortgage contract.
C1
14 - 31
Se'ured and
Se'ured and
Inse'ured
Inse'ured
Se'ured and
Se'ured and
Inse'ured
Inse'ured
,erm and
,erm and
Serial
Serial
,erm and
,erm and
Serial
Serial
!e(istered
!e(istered
and Bearer
and Bearer
!e(istered
!e(istered
and Bearer
and Bearer
Con+ertible
Con+ertible
and Callable
and Callable
Con+ertible
Con+ertible
and Callable
and Callable
&eatures o* Bonds and Hotes
A2
14 - 32
,his ratio hel#s in+estors determine the risk o* in+estin( ,his ratio hel#s in+estors determine the risk o* in+estin(
in a 'om#an b di+idin( its total liabilities b total e)uit. in a 'om#an b di+idin( its total liabilities b total e)uit.
,his ratio hel#s in+estors determine the risk o* in+estin( ,his ratio hel#s in+estors determine the risk o* in+estin(
in a 'om#an b di+idin( its total liabilities b total e)uit. in a 'om#an b di+idin( its total liabilities b total e)uit.
Debt=to=?)uit !atio
Debt-to-
Aquity 'atio
Total Liabilities
Total Aquity
$
A3
14 - 33
"resent +alue of $1
,ate
"eriods 3* &* '*
1

0.%-0%

0.%61'

0.%'2&
2

0.%&26

0.%2&6

0.%0-0
3

0.%1'1

0.!!%0

0.!63!
&

0.!!!'

0.!'&!

0.!22-
'

0.!626

0.!21%

0.-!3'
6

0.!3-'

0.-%03

0.-&62
-

0.!131

0.-'%%

0.-10-
!

0.-!%&

0.-30-

0.6-6!
%

0.-66&

0.-026

0.6&&6
10

0.-&&1

0.6-'6

0.613%
A##endi- $%A:
Present 2alues o* Bonds and Hotes
(ace amount $ 1,//-///
!ontract rate $ 24
)ar>et rate $ ,/4
Interest "aid semiannually
(irst- we calculate t#e "resent
value of t#e "rinci"al
re"ayment in B "eriods 8. years
& . "ayments "er year- using
C4 mar>et rate 8,/4 annual
rate D . "ayments "er year9.
3$44,444 A 4.6//C B 36/,/C4
3$44,444 A 4.6//C B 36/,/C4
C2
14 - 34
"resent +alue of .nnuity of $1
,ate
"eriods 3* &* '*
1

0.%-0%

0.%61'

0.%'2&
2

1.%13'

1.!!61

1.!'%&
3

2.!2!6

2.--'1

2.-232
&

3.-1-1

3.62%%

3.'&60
'

&.'-%-

&.&'1!

&.32%'
6

'.&1-2

'.2&21

'.0-'-
-

6.2303

6.0021

'.-!6&
!

-.01%-

6.-32-

6.&632
%

-.-!61

-.&3'3

-.10-!
10

!.'302

!.110%

-.-21-
A##endi- $%A:
Present 2alues o* Bonds and Hotes
3$44,444 A 61 A G B 3%,444 3$44,444 A 61 A G B 3%,444 3$44,444 A 61 A G B 3%,444 3$44,444 A 61 A G B 3%,444
Semiannual Interest Annuity
"resent
.mount "+ /actor +alue
"rincipal $ 100,000 0.!22- $ !2,2-0
0nterest

!,000 3.'&60 1&,1!&
0ssue price of debt $ %6,&'&

3%,444 A 8.0%54 B 3$%,$6%
3%,444 A 8.0%54 B 3$%,$6%
C2
14 - 35
?nd o* Cha#ter $%

Chap 14

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