Ch 14 : Long Term Liabilities
► What is a Long term Liability?: (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.
Examples:
 Bonds payable
 Long-term notes payable
 Mortgages payable
 Pension liabilities
 Lease liabilities
► Bonds Payable




Bonds represent an obligation to repay sum of money (Face, Maturity, Par) Value at a
future date (Maturity Date) ‫تاريخ االستحقاق‬
Paper certificate for each bond, typically a $1,000 face value.
Pay a periodic interest at a contractual (stated) rate on the maturity amount (face value).
Generally issued when the amount of capital needed is too large for one lender to supply.
The Timelines of the bonds will be as follows:
Year 1
Carrying
Value
Or
Present Value
Year 2
Year 3
$1000
$100
$100
$1000
$100
$1100
$900
Bond issued at Par
Bond issued at Discount
Bond issued at Premium
► Types of Bonds:
1.
2.
3.
4.
Secured and Unsecured (debenture) bonds.
Term and Serial bonds.
Registered and Bearer (or coupon) bonds.
Convertible and Callable bonds.
► Accounting for Bonds Payable
Bonds Issued at Par
Cash Received = Face Value
$100,000 = $100,000
Stated Rate = Market Rate
10%
= 10%
Bonds not Issued at Par
Bonds Issued at Discount
Bonds Issued at Premium
Cash received < Face Value
Cash Received > Face Value
$80,000 < $100,000
$120,000 >
$100,000
Stated Rate < Market Rate Stated Rate
> Market Rate
8%
< 10%
12%
>
10%
‫تدفع الشركة فائدة أقل من السوق وبالتالي‬
‫تدفع الشركة فائدة أعلى من السوق وبالتالي‬
‫تقوم بتعويض حملة السندات في نهاية المدة‬
‫تقوم بدفع مبلغ أقل لحملة السندات في نهاية‬
.‫بدفع مبلغ أكبر‬
.‫المدة‬
Intermediate Accounting 2:IFRS
Page 1 of 9
Ehab Abdou 97672930
Ch 14 : Long Term Liabilities
Bonds Issued at Par:
Exercise 1:
On January 1, 2011, Candlestick, Inc. sells (Issues) $500,000, five-year, 10% bonds for $500,000
Interest is payable semi-annually on July 1 and January 1, The market yield for similar risk and
maturity is 10%
Instructions:
Prepare all required journal entries.
Solution:
The Time Line of Bonds is as follows:
Dec 31, 2011 Adjusting Entry
Jan 1, 2011
(a)
(b)
(c)
(d)
(d)
Jan.
2011
1
July
2011
1
Dec.
2011
31
Jan.
2012
1
Jan.
2016
1
July 1, 2011
Jan 1, 2012
Cash .......................................................................
Bonds Payable ................................................
500,000
Bond Interest Expense .............................................
Cash ($500,000 X 10% X 6/12).......................
25,000
Bond Interest Expense .............................................
Bond Interest Payable .....................................
25,000
Bond Interest Payable ..............................................
Cash ...............................................................
25,000
Bond Payable ...........................................................
Cash ...............................................................
500,000
Intermediate Accounting 2:IFRS
Page 2 of 9
500,000
25,000
25,000
25,000
500,000
Ehab Abdou 97672930
Ch 14 : Long Term Liabilities
Bonds Not Issued at Par:
Exercise 2:
On January 1, 2011, Piper Co. issued ten-years bonds with a face value of $1,000,000 and a
stated interest rate of 10%, payable semiannually on June 30 and December 31. The bonds were
sold to yield 12%. Table values are:
Present value of 1 for 10 periods at 10% .................................
.386
Present value of 1 for 10 periods at 12% .................................
.322
Present value of 1 for 20 periods at 5% ...................................
.377
Present value of 1 for 20 periods at 6% ...................................
.312
Present value of annuity for 10 periods at 10% ........................
6.145
Present value of annuity for 10 periods at 12% ........................
5.650
Present value of annuity for 20 periods at 5% .........................
12.462
Present value of annuity for 20 periods at 6% .........................
11.470
Instructions
(a) Calculate the issue price of the bonds.
(b) Prepare the discount amortization schedule.
(c) Prepare all required Journal entries for the first year.
Solution:
(a) Calculation of the issue price of the bonds:
1- Periodic Interest = Face Value × Stated Rate × (Period/12)
= $1000,000 × 10%
× (6/12)
= $50,000
2- P.V of Interest
= Periodic Interest × PVF-A n,i
= $50,000 × 11.470
[ n= 20 , i= 6% ] – Table 6-4
= $573,500
3- P.V of Bonds
= Bond Payable × PVF n,i
= $1,000,000 × 0.312
[ n= 20 , i= 6% ] – Table 6-2
= $312,000
4- Price of Bonds
= P.V of Interest + P.V of Bonds
= $573,500 + $312,000
= $885,500
(b) Discount amortization Schedule.
Date
Interest
Paid
Interest
Expenses
Discount
Amortization
01/01/2011
06/30/2011
$ 885,500
$ 50,000
1,000,000 × 10% × 6/12
12/31/2011
$ 50,000
1,000,000 × 10% × 6/12
06/30/2012
Carrying
Amount
$ 50,000
1,000,000 × 10% × 6/12
Intermediate Accounting 2:IFRS
$ 53,130
885,500 × 12% × 6/12
$ 53,318
888,630 × 12% × 6/12
$ 53,517
891,948 × 12% × 6/12
Page 3 of 9
$ 3,130
53,130 – 50,000
$ 3,318
53,130 – 50,000
$ 3,517
53,517 – 50,000
888,630
885,500 + 3,130
891,948
888,630 + 3,318
895,465
891,948 + 3,517
Ehab Abdou 97672930
Ch 14 : Long Term Liabilities
(c) Journal Entries.
Jan. 01, 2011
Cash .......................................................................
Bonds Payable ................................................
885,500
June 30, 2011 Bond Interest Expense (885,500 X 12% X 6/12)... [1]
Bond Payable ($53,130 - $50,000) ............. [3]
Cash ($1,000,000 X 10% X 6/12)................ [2]
53,130
Dec 31, 2011
Bond Interest Expense .............................................
([885,500+3,130] X12%X 6/12)
Bond Payable ($53,130 - $50,000) .................
Cash ($1,000,000 X 10% X 6/12)....................
53,318
June 30, 2012 Bond Interest Expense .............................................
([885,500+3,130+3,318] X12%X 6/12)
Bond Payable ($53,130 - $50,000) .................
Cash ($1,000,000 X 10% X 6/12)....................
53,517
885,500
3,130
50,000
3,318
50,000
3,517
50,000
Additional Requirement:
Assume That Piper Co. Calls (Retire) the entire issue at 101 after paying of interest on June 30, 2012.
Prepare the necessary journal entry to record the early extinguishment of bonds?
June 30, 2012 Bond Payable ...........................................................
Loss on Early extinguishment ...................................
Cash ($1,000,000 × 101%) .............................
895,465
114,535
1,010,000
DO IT !!
Exercise 3:
On January 1, 2011, Piper Co. issued ten-years bonds with a face value of $1,000,000 and a
stated interest rate of 14%, payable semiannually on June 30 and December 31. The bonds were
sold to yield 12%. Table values are:
Present value of 1 for 10 periods at 10% .................................
.386
Present value of 1 for 10 periods at 12% .................................
.322
Present value of 1 for 20 periods at 5% ...................................
.377
Present value of 1 for 20 periods at 6% ...................................
.312
Present value of annuity for 10 periods at 10% ........................
6.145
Present value of annuity for 10 periods at 12% ........................
5.650
Present value of annuity for 20 periods at 5% .........................
12.462
Present value of annuity for 20 periods at 6% .........................
11.470
Instructions
(a) Calculate the issue price of the bonds.
(b) Prepare the discount amortization schedule.
(c) Prepare all required Journal entries for first year of bonds.
Intermediate Accounting 2:IFRS
Page 4 of 9
Ehab Abdou 97672930
Ch 14 : Long Term Liabilities
Special Cases:
1- Bonds Issued between interest dates
Exercise 3:
On May 1, 2011, Piper Co. issued $100,000 of five-year bonds for $108,039 with a stated interest
rate of 8%, payable semiannually on July 1 and January 1. The bonds were sold to yield 6%.
Instructions:
1- Prepare all required journal entries.
Solution:
The Time Line of the Bonds is as follows:
Dec 31, 2011 Adjusting
Entry
2M
4 Month
Jan 1, 2011
July 1, 2011
Jan 1, 2012
May 1, 2011
Issue Date
Journal Entries:
Date
May 1, 2011
July 1, 2011
Accounts
[3]
[2]
[1]
[1]
[3]
[2]
Dec 31, 2011 [1]
[3]
[2]
Jan 01, 2012 [1]
[2]
Cash
Bonds Payable
Bond Interest Expense
(100,000 x 8% x 4/12)
Bond Interest Expenses (108,039 x 6% x 6/12)
Bond Payable
Cash (100,000 x 8% x 6/12)
Bond Interest Expenses [(108,039 – 253) x 6% x 6/12)
Bond Payable
Bond Interest Payable (100,000 x 8% x 6/12)
Bond Interest Payable
Cash
Intermediate Accounting 2:IFRS
Page 5 of 9
Dr.
110,706
Cr.
108,039
2,667
3,747
253
4,000
3,233
767
4,000
4,000
4,000
Ehab Abdou 97672930
Ch 14 : Long Term Liabilities
2- Accruing interest at end of year
Exercise 4:
Holden Co. sells $300,000 of 10% bonds on March 1, 2011. The bonds pay interest on September
1 and March 1. The due date of the bonds is September 1, 2014. The bonds yield 12%, selling for
$283,250. Give entries through March 1, 2012.
Instructions:
(a) Prepare all required Journal entries for the first year.
Solution:
The Time Line of the Bonds is as follows:
Dec 31, 2011
Adjusting Entry
6 Month
Jan 1
2011
4 Month
July 1
2011
March 1, 2011
Issue Date
Jan 1
2012
Sep 1, 2011
Receive
Interest
March 1, 2012
Receive
Interest
6 Month
Journal Entries
3/1/11
Cash.........................................................................................
Bonds Payable ..............................................................
283,250
283,250
Interest Expense ($283,250 × 12% × 6/12).................................... 16,995
Bonds Payable ..............................................................
Cash ($300,000 ×10% × 6/12) .......................................
1,995
15,000
12/31/11 Interest Expense [($283,250 + $1,995) × 12% × 4/12]................ 11,410
Bonds Payable ..............................................................
Interest Payable ($300,000 × 10% x 4/12) .....................
1,410
10,000
9/1/11
3/1/12
Interest Expense [($283,250 + $1,995) × 12% × 2/12].................
Interest Payable .....................................................................
Bonds Payable ..............................................................
Cash ..............................................................................
Date
3/1/11
9/1/11
3/1/12
Cash
Paid
Interest
Expense
Discount
Amortized
$15,000
15,000
$16,995
17,115
1,995
2,115
Intermediate Accounting 2:IFRS
Page 6 of 9
5,705
10,000
705
15,000
Carrying Amount
$283,250
285,245
287,360
Ehab Abdou 97672930
Ch 14 : Long Term Liabilities
3- Extinguishment of Bond Payable
Exercise 5:
Evermaster bonds issued at a discount for $92,278 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%, Two years after the issue date on January 1, 2013, Evermaster calls the
entire issue at 101 and cancels it.
Instructions:
Prepare the journal entry to record the early extinguishment of Bonds
Date
Jan 1, 2013
[2]
[3]
[1]
Accounts
Bonds Payable
Loss on extinguishment of bonds
Cash (100,000 x 101%)
Intermediate Accounting 2:IFRS
Page 7 of 9
Dr.
94,925
6,075
Cr.
101,000
Ehab Abdou 97672930
Ch 14 : Long Term Liabilities
Long-Term Notes Payable
Accounting for Note Payable is Similar to Bonds payable
 A 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.
Notes Issued at Face Value
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
Date
Jan 1, 2011
Dec 31, 2011
Accounts
Cash
Note Payable
Interest Expenses
Cash ( $100,000 × 10% )
Dr.
100,000
Cr.
100,000
100,000
100,000
Notes Not Issued at Face Value
a. Zero-Interest-Bearing Notes
BE14-10: 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.
Date
Jan 1, 2011
Dec 31, 2011
Accounts
Cash
Note Payable
Interest Expenses
Note Payable ( $47,663 × 12% )
Intermediate Accounting 2:IFRS
Page 8 of 9
Dr.
47,663
Cr.
47,663
5,720
5,720
Ehab Abdou 97672930
Ch 14 : Long Term Liabilities
b. Interest-Bearing Notes
BE14-11:
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.
Date
Jan 1, 2011
Dec 31, 2011
Accounts
Computer
Note Payable
Interest Expenses ( $31,495 × 12% )
Cash ( $40,000 × 5% )
Note Payable
Intermediate Accounting 2:IFRS
Page 9 of 9
Dr.
31,495
Cr.
31,495
3,779
2,000
1,779
Ehab Abdou 97672930