Kế toán, kiểm toán - Chapter 14: Bonds and long-Term notes

Bonds and Long-Term Notes14 Learning ObjectivesIdentify the underlying characteristicsof debt instruments and describe thebasic approach to accounting for debt.LO1Nature of Long-Term DebtObligations that extend beyond one year or the operating cycle, whichever is longerMirror image of an assetAccrue interest expenseReported at present valueLoan agreement restrictionsBonds Bond Selling PriceBond CertificateInterest PaymentsFace Value Payment at End of Bond TermAt Bond Issuance DateCompany Issuing BondsSubsequent PeriodsInvestor Buying BondsCompany Issuing BondsInvestor Buying BondsThe Bond IndentureDebenture BondMortgage BondSubordinated DebentureCoupon BondsCallableSinking FundSerial BondsConvertible BondsThe indenture is the written specific promises made by the company to the bondholders.Types of BondsBondsBOND PAYABLEFace Value $1,000Interest 10%6/30 & 12/31Maturity Date 12/31/15Bond Date 1/1/061. Face value (maturity or par value)2. Maturity Date3. Stated Interest Rate 4. Interest Payment Dates 5. Bond Date Other Factors:6. Market Interest Rate7. Issue DateLearning ObjectivesAccount for bonds issued at par, at a discount,or at a premium, recording interest at theeffective rate or by the straight-line method.LO2Recording Bonds at IssuanceOn 1/1/06, Matrix, Inc. issues 1,000 bonds at face value to Apex, Inc. The market interest rate is 10%. The bonds have the following terms:Face Value = $1,000Maturity Date = 12/31/10 (5 years) Stated Interest Rate = 10%Interest Dates = 6/30 & 12/31Bond Date = 1/1/06Record the issuance of the bonds on 1/1/06.Recording Bonds at IssuanceMatrix, Inc. - IssuerApex, Inc. - InvestorBonds Issued Between Interest DatesInterest begins to accrue on the date the bonds are dated. If the bonds are issued after the day they are dated, the investor would be asked to pay the company accrued interest. On the interest payment date, the investor will receive a check for the full period’s interest.1/1/06BondsDated1/12/06BondsSold6/30/06First InterestPayment DateBonds Issued Between Interest DatesOn 1/12/06, Matrix, Inc. issues 1,000 bonds at face value plus accrued interest to Apex, Inc. The market interest rate is 10%. The bonds have the following terms:Face Value = $1,000Maturity Date = 12/31/10 (5 years) Stated Interest Rate = 10%Interest Dates = 6/30 & 12/31Bond Date = 1/1/06Bonds Issued Between Interest DatesAccrued Interest$1,000,000 × 10% = $100,000 ÷ 360 days = $277.78 interest per day11 days × $277.78 = $3,055.56Matrix - IssuerApex - InvestorBonds Issued Between Interest DatesAt the first interest date$1,000,000 × 10% × ½ = $50,000 cashMatrix - IssuerApex - InvestorDetermining the Selling PriceDetermining the Selling PriceOn 1/1/06, Matrix, Inc. issues 1,000 bonds at face value to Apex, Inc. The market interest rate is 12%. The bonds have the following terms:Face Value = $1,000Maturity Date = 12/31/10 (5 years) Stated Interest Rate = 10%Interest Dates = 6/30 & 12/31Bond Date = 1/1/06What is the selling price of these bonds?Determining the Selling Pricen = 5 years × 2 payments per year = 10i = 12% ÷ 2 payments per year = 6%Interest annuity = $1,000,000 × 10% ÷ 2 = $50,000Bonds issued at a discount.Determining the Selling PriceMatrix, Inc. - IssuerApex, Inc. - InvestorDetermining InterestEffective Interest Method(Effective rate multiplied by the outstanding balance of the debt)$926,395 × 6%$55,584 - $50,000 $926,395 + $5,584 Determining InterestEffective Interest Method(Effective rate multiplied by the outstanding balance of the debt)Determining InterestMatrix, Inc. - IssuerApex, Inc. - InvestorZero-Coupon Bonds These bonds do not pay interest. Instead, they offer a return in the form of a “deep discount” from the face amount. Those who invest in zero-coupon bonds usually have tax-deferred or tax-exempt status. Bonds Sold at a PremiumOn 1/1/06, Matrix, Inc. issues 1,000 bonds at face value to Apex, Inc. The market interest rate is 8%. The bonds have the following terms:Face Value = $1,000Maturity Date = 12/31/10 (5 years) Stated Interest Rate = 10%Interest Dates = 6/30 & 12/31Bond Date = 1/1/06What is the selling price of these bonds?Bonds Sold at a Premiumn = 5 years × 2 payments per year = 10i = 8% ÷ 2 payments per year = 4%Interest annuity = $1,000,000 × 10% ÷ 2 = $50,000Bonds issued at a premium.Bonds Sold at a PremiumMatrix, Inc. - IssuerApex, Inc. - InvestorBonds Sold at a PremiumFinancial Statements Prepared Between Interest DatesAssume that in our previous example, Matrix, Inc. and Apex, Inc. both have fiscal years that end on September 30. Let’s look at the June 30 entry:Matrix, Inc. - IssuerApex, Inc. - InvestorYear-end is on September 30, 2006, before the second interest date of December 31.$42,974 × ½ = $21,487 (3 months interest)$ 7,026 × ½ = $ 3,513 (3 months amortization)Matrix, Inc. - IssuerFinancial Statements Prepared Between Interest DatesApex, Inc. - InvestorFinancial Statements Prepared Between Interest DatesThe entries at December 31, 2006.Matrix, Inc. - IssuerApex, Inc. - InvestorStraight-Line Method The discount or premium is allocated equally to each period over the outstanding life of the bond.Consideredpracticalandexpedient.Straight-Line MethodIn our last example, straight-linepremium amortization would be:$81,105 ÷ 10 = $8,111 every six months.Straight-Line MethodDebt Issue Costs Legal Accounting Underwriting Commission Engraving Printing Registration Promotion Debt Issue CostsThese costs should be recorded separately and amortized over the term of the related debt.Straight-line amortization is often used. Learning ObjectivesCharacterize the accounting treatment of notes including installment notes, issued for cash or for noncash consideration.LO3Long-Term NotesPresent value techniques are used for valuation and interest recognition.The procedures are similar to those we encountered with bonds. Notes Exchanged for Assets or ServicesOn 1/1/06, Matrix, Inc. issued a $100,000, 3-year, 6% note in exchange for equipment owned by Apex, Inc. Interest is paid every 12/31. The equipment does not have a ready market value. The appropriate rate of interest for notes of this type is 9%.Let’s determine the present value of the note.Notes Exchanged for Assets or ServicesNotes Exchanged for Assets or ServicesLet’s prepare the entries on January 1.Amortization ScheduleNotes Exchanged for Assets or ServicesMatrix, Inc. - PurchaserApex, Inc. - SellerNotes Exchanged for Assets or ServicesEntries for the first interest period.Matrix, Inc. - PurchaserApex, Inc. - SellerInstallment NotesTo compute cash payment use present value tables.Interest expense or revenue: Effective interest rate× Outstanding balance of debt Interest expense or revenuePrincipal reduction: Cash amount– Interest component Principal reduction per periodInstallment NotesOn January 1, 2006, Matrix, Inc. purchased a truck by issuing a 4-year note payable to Apex Motors. The truck cost $50,000 and is financed at a 9% interest rate. Payments are made at the end of each of the next four years. Let’s calculate the annual payment.$50,000 ÷ 3.23972 = $15,433 (rounded)PV of annuity of $1, n = 4, i = 9%Installment NotesHere is our loan amortization table.Installment NotesThe entries on date of purchase are:Matrix, Inc. - PurchaserApex Motors - SellerInstallment NotesDate of first payment.Matrix, Inc. - PurchaserApex Motors - SellerLearning ObjectivesDescribe the disclosures appropriateto long-term debt in its various forms.LO4Financial Statement DisclosuresLong-Term DebtFor all long-term borrowing, disclosures should include the aggregate amounts maturing and sinking fund requirement, if any, for each of the next five years.Decision Makers’ PerspectiveLong-term debt impacts several key financial ratios.Debt toequity ratioTotal liabilitiesShareholders’ equity=Rate of return on assetsNet incomeTotal assets=Rate of return on shareholders’ equityNet incomeShareholders’ equity=Times interest earned ratio=Net income + interest + taxesInterestLearning ObjectivesRecord the early extinguishment of debtand its conversion into equity securities.LO5Early Extinguishment of DebtDebt retired at maturity results in no gains or losses. Debt retired before maturity may result in an gain or loss on extinguishment.Cash Proceeds – Book Value = Gain or LossBUTConvertible BondsSome bonds may be converted into common stock at the options of the holder. When bonds are converted the issuer updates interest expense and amortization of discount or premium to the date of conversion. The bonds are reduced and shares of common stock are increased.Bonds into StockConvertible BondsThe Book Value Method Record new stock at the book value of the convertible bonds. No gain or loss is recognized.On December 31, 2006, all of the bondholders of Matrix, Inc. convert their bonds into common stock. There are 10,000 bonds outstanding with a face value of $1,000 each. Each bond is convertible into 50 shares of the company’s $1 par value common stock. There is $1,500,000 on unamortized discount associated with the bonds that are converted. Interest and discount amortization have been brought up to December 31.Let’s look at the entry to record the conversion.Convertible Bonds10,000 × 50 shares × $1 par valueThe carrying value of the bonds is assigned to the stock.Induced ConversionCompanies sometimes try to induce conversion of their bonds into stock. One way to induce conversion is through a “call” provision. When the specified call price is less than the conversion value of the bonds (the market value of the shares), calling the convertible bonds provides bondholders with incentive to convert. Bondholders will choose the shares rather than the lower call price.Bonds With Detachable WarrantsStock warrants provide the option to purchase a specified number of shares of common stock at a specified option price per share within a stated period.A portion of the selling price of the bonds is allocated to the detachable stock warrants.Bonds With Detachable WarrantsMatrix issues at par 10,000, $1,000 face value, 8% debt with detachable warrants that permit the holder to purchase one share of stock for $18 per share. Immediately after the issue the bonds were selling for 98 without the warrants and the warrants have a market value of $16. Bonds With Detachable WarrantsMatrix issues at par 10,000, $1,000 face value, 8% debt with detachable warrants that permit the holder to purchase one share of stock for $18 per share. Immediately after the issue the bonds were selling for 98 without the warrants and the warrants have a market value of $16. Journal entry at date of issuance of the bonds.Bonds With Detachable WarrantsAssume that all 10,000 warrants are exercised and Matrix received $180,000 (10,000 × $18 per share) and issues 10,000 shares of its $1 par value common stock. Appendix 14Troubled Debt RestructuringTroubled Debt RestructuringTroubled debt may berestructured in one of two ways:Settled at timeof restructuring.Continued withmodified terms.Troubled Debt RestructuringSettled at time of restructuring. Book value of the debt– Fair value of asset transferred Gain on restructuringDebtor reports ordinary gain or loss onadjustment to fair value of theasset transferred.Troubled Debt RestructuringContinued with modified terms.Reduce or delayinterest payments.Reduce or delaymaturity payment.Accounting treatment depends on a comparison of total cash payments after restructuring with the book value of the original debt.Troubled Debt RestructuringContinued with modified terms.Cash payments less thanbook value of debt.Cash payments more thanbook value of debt.Debtor reports differenceas a gain.All cash payments arereductions in principal.(No interest)No gain reported.Compute neweffective interest rate.Record annualinterest at new rate.End of Chapter 14