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Thirteenth Edition
Weygandt Kimmel Kieso
Chapter 15
Long-Term Liabilities
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
Chapter Outline
Learning Objectives
LO 1 Describe the major characteristics of bonds.
LO 2 Explain how to account for bond transactions.
LO 3 Explain how to account for long-term notes
payable.
LO 4 Discuss how long-term liabilities are reported and
analyzed.
0 1 2 3 4 5 Years
ILLUSTRATION 15.3
Time diagram depicting
LO 1 cash flows Copyright ©2018 John Wiley & Son, Inc. 10
Determining the Market Price of a Bond
ILLUSTRATION 15.3 $100,000 Principal
$9,000 $9,000 $9,000 $9,000 $9,000 Interest
0 1 2 3 4 5 Years
8% Premium
Bond Issued
Contractual when
10% Face Value
Interest
Rate 10%
12% Discount
ILLUSTRATION 15.5
Interest rates and bond prices
LO 2 Copyright ©2018 John Wiley & Son, Inc. 14
Accounting for Bond Transactions
The market interest rate:
a. is the contractual interest rate used to determine
the amount of cash interest paid by the
borrower.
b. is listed in the bond indenture.
c. is the rate investors demand for loaning funds.
d. More than one of the above is true.
Candlestick Inc.
Balance Sheet (partial)
Long-term liabilities
Bonds payable $100,000
Less: Discount on bonds payable 2,000 $98,000
ILLUSTRATION 15.9
Amortization of bond discount
Candlestick Inc.
Balance Sheet (partial)
Long-term liabilities
Bonds payable $100,000
Add: Premium on bonds payable 2,000 $102,000
ILLUSTRATION 15.13
Amortization of bond premium
The higher the percentage, the greater the risk that the
company may be unable to meet its maturing obligations.
Net Income +
Interest Expense + Interest Times Interest
Income Tax Expense ÷ Expense = Earned
$4,018 + $403 + $228 ÷ $403 = 11.5 times
Discount Bond
Interest Interest to Interest Amortization Unamortized Carrying
Period Be Paid Expense ($2,000 ÷ 5) Discount Value
Issue date $2,000 $ 98,000
1 $10,000 $10,400 $ 400 1,600 98,400
2 10,000 10,400 400 1,200 98,800
3 10,000 10,400 400 800 99,200
4 10,000 10,400 400 400 99,600
5 10,000 10,400 400 0 100,000
$50,000 $52,000 $2,000
LO 5 Copyright ©2018 John Wiley & Son, Inc. 48
Amortizing Bond Discount
Discount Bond
Interest Interest to Interest Amortization Unamortized Carrying
Period Be Paid Expense ($2,000 ÷ 5) Discount Value
Issue date $2,000 $ 98,000
1 $10,000 $10,400 $ 400 1,600 98,400
2 10,000 10,400 400 1,200 98,800
Premium Bond
Interest Interest to Interest Amortization Unamortized Carrying
Period Be Paid Expense ($2,000 ÷ 5) Premium Value
Issue date $2,000 $ 102,000
1 $10,000 $9,600 $ 400 1,600 101,600
2 10,000 9,600 400 1,200 101,200
3 10,000 9,600 400 800 100,800
4 10,000 9,600 400 400 100,400
5 10,000 9,600 400 0 100,000
$50,000 $48,000 $2,000