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Lecture Financial accounting: Information for decisions (7/e): Chapter 10 - John J. Wild

Chapter 10 - Reporting and analyzing long-term liabilities. After studying this chapter you will be able to: Explain the types and payment patterns of notes, compare bond financing with stock financing, assess debt features and their implications, compute the debt-to-equity ratio and explain its use, prepare entries to record bond issuance and interest expense, compute and record amortization of bond discount using straight-line method,. | Financial Accounting John J. Wild Seventh Edition Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 10 Reporting and Analyzing Long-Term Liabilities Bonds do not affect owner control. Interest on bonds is tax deductible. Bonds can increase return on equity. Advantages of Bonds A1 10- Bonds require payment of both periodic interest and par value at maturity. Bonds can decrease return on equity when the company pays more in interest than it earns on the borrowed funds. Disadvantages of Bonds A1 10- . . .an investment firm called an underwriter, resells the bonds to A trustee monitors the bond issue. A company can sell the bonds to . . . investors Bond-Issuing Procedures A1 10- Bond Issue Date Bond Interest Payments Bond Interest Payments Corporation Investors Interest payment = Bond par value ´ Contract interest rate x Time Basics of Bonds A1 10- Bond Discount or Premium P1 10- Dow Chemical Company $1,000 8.875% paid semiannually on 6/30 and 12/31 Due (matures) on 2033 Contract rate Bond Retirement The carrying value of the bond at maturity always equals its par value. Sometimes bonds are retired prior to their maturity. Two common ways to retire bonds, before maturity are through the exercise of a callable option or through purchasing them on the open market. Callable bonds present several accounting issues including calculating gains and losses. P4 10- Note Maturity Date Note Payable Cash Company Lender Note Issuance Date When is the repayment of the principal and interest going to be made? Long-Term Notes Payable C1 10- Note Maturity Date Company Lender Note Issuance Date Long-Term Notes Payable Single Payment of Principal plus Interest Single Payment of Principal plus Interest (at maturity) C1 10- Note Maturity Date Company Lender Note Issuance Date Long-Term Notes Payable Regular Payments of Principal plus Interest Payments can either be equal principal payments plus interest or equal payments. Regular Payments of Principal plus Interest C1 10- (Over the life of the bond) Secured or Unsecured Term or Serial Registered or Bearer Convertible and/or Callable Types of Bonds A2 10- End of Chapter 10 10- | Financial Accounting John J. Wild Seventh Edition Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 10 Reporting and Analyzing Long-Term Liabilities Bonds do not affect owner control. Interest on bonds is tax deductible. Bonds can increase return on equity. Advantages of Bonds A1 10- Bonds require payment of both periodic interest and par value at maturity. Bonds can decrease return on equity when the company pays more in interest than it earns on the borrowed funds. Disadvantages of Bonds A1 10- . . .an investment firm called an underwriter, resells the bonds to A trustee monitors the bond issue. A company can sell the bonds to . . . investors Bond-Issuing Procedures A1 10- Bond Issue Date Bond Interest Payments Bond Interest Payments Corporation Investors Interest payment = Bond par value ´ Contract interest rate x Time Basics of Bonds A1