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Chapter 14 - Long-Term Liabilities
Chapter 14
Long-Term Liabilities
QUESTIONS
1. Notes payable generally involve borrowing from a single creditor, whereas bonds
payable are usually sold to many different lenders (bondholders).
2. A bond is a liability of the issuing company. A share of stock represents an ownership
interest in the company.
3. Bonds can allow a company’s owners to increase their return on equity without investing
additional amounts. This result occurs as long as the rate of return on the assets
4. A bond indenture is a legal contract between the issuing company and the bondholders
that identifies the obligations and rights of both parties. It specifies such items as the
5. A trustee for bondholders has the responsibility of monitoring the issuer’s actions,
6. The contract rate (also known as the coupon rate, stated rate, or nominal rate) is the rate
7. In general, the supply of and demand for bonds affect market rates. The market rate for
8.BThe effective interest method creates a constant rate of interest over a bond’s life
because the market rate at the time of issuance is multiplied by the beginning balance
9.CWhen issuing bonds between interest dates, a company collects accrued interest from
the purchasers to avoid keeping detailed records of bond purchasers and the dates
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10. The price of bonds can be computed by finding the present value of both the par value at
11. The issue price of a $2,000 bond sold at 98 ¼ is 98.25% of $2,000, or $1,965. The issue
price of a $6,000 bond priced at 101 ½ is 101.5% of $6,000, or $6,090.
12. The debt-to-equity ratio is calculated by dividing total liabilities by total equity. The
higher a company’s debt-to-equity ratio, the higher proportion of a company’s assets
13. An entrepreneur (owner) must repay the bondholders the principal (par value) according
14. Apple reports long-term debt of $16,960 million on its balance sheet. Apple also reports
15. Samsung’s long-term borrowings decreased by 2,637,911 million (computed as₩
3,623,028 million - 985,117 million) during the year ended December 31, 2013.₩ ₩
16. Per Samsung’s statement of cash flows (financing section), the company made
17. The balance sheet of Google indicates that for the year ended December 31, 2013, the
18.DIf a lease qualifies to be recorded as a capital lease, an asset account for the leased
19.DAn operating lease is a short-term or cancelable lease in which the lessor retains the
risks and rewards of ownership. The lessee expenses operating lease payments when
20.DPension plans can be designed as defined benefit plans or defined contribution plans. In
a defined benefit plan the employer estimates the contribution necessary to pay a pre-
defined benefit amount to its retirees. For example, an employee’s monthly pension
year.
QUICK STUDIES
14-770
Chapter 14 - Long-Term Liabilities
Quick Study 14-1 (5 minutes)
Quick Study 14-2 (10 minutes)
2015
Jan. 1 Cash.................................................................................218,750
Discount on Bonds Payable..........................................31,250
Bonds Payable.......................................................... 250,000
To record issuing bonds at a discount.
Quick Study 14-3 (10 minutes)
Using facts in QS 14-2, the bond’s cash proceeds for the bond selling at
a discount are computed as follows
Cash Flow Table Value Present Value
*Agrees with $218,750 as given in QS 14-2, except for rounding difference.
(Instructor note: The price in QS 14-2 is rounded to 87.5 from 87.5388, yielding the $97 difference.)
Quick Study 14-4 (10 minutes)
2015
Quick Study 14-5 (10 minutes)
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Chapter 14 - Long-Term Liabilities
Using facts in QS 14-4, the bond’s cash proceeds for the bond selling at
a premium are computed as
Cash Flow Table Value Present Value
Quick Study 14-6 (10 minutes)
1. Bond’s cash proceeds: $250,000 x 0.875 = $218,750
2. Twenty semiannual interest payments of $10,000*................ $200,000
3. Bond interest expense on first payment date:
Quick Study 14-7 (15 minutes)
2014
(a)
Dec. 31 Cash.................................................................................92,640
2015
(b)
June 30 Bond Interest Expense..................................................5,736
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Chapter 14 - Long-Term Liabilities
(c)
Dec. 31 Bond Interest Expense..................................................5,736
Quick Study 14-8 (10 minutes)
1. Bond’s cash proceeds: $250,000 x 1.23375 = $308,437.5 or $308,438 rounded
3. Bond interest expense on first payment date:
$141,562 / 20 semiannual periods = $7,078 (rounded to whole dollars)
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Chapter 14 - Long-Term Liabilities
Quick Study 14-9 (10 minutes)
2015
July 1 Bonds Payable................................................................400,000
Premium on Bonds Payable..........................................16,000
Quick Study 14-10 (10 minutes)
2015
Jan. 1 Bonds Payable.................................................................2,000,000
Quick Study 14-11 (10 minutes)
Amount of annual payment =
a. 4%: Payment = $340,000 / 4.4518 = $76,374*
*Rounded to whole dollars.
Quick Study 14-12 (10 minutes)
1. A Registered bond 5. E Convertible bond
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Initial cash proceeds from note
Table B.3 present value for 5 payments
Chapter 14 - Long-Term Liabilities
Quick Study 14-13 (10 minutes)
Ratio of debt to equity
Atlanta Company Spokane Company
Analysis and interpretation: Atlanta Company’s debt-to-equity ratio of 0.75
implies a riskier financing structure than Spokane Company’s 0.30 debt-to-
equity ratio.
Quick Study 14-14B (10 minutes)
1. Bond’s cash proceeds: $240,000 x .7525 = $180,600
2. Thirty semiannual interest payments of $12,000*.................. $360,000
*$240,000 x 0.10 x ½ = $12,000
3. Bond interest expense on first payment date:
Quick Study 14-15B (10 minutes)
1. Bond’s cash proceeds: $240,000 x 1.1725 = $281,400
*$240,000 x 0.10 x ½ = $12,000
3. Bond interest expense on first payment date:
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Chapter 14 - Long-Term Liabilities
Quick Study 14-16C (10 minutes)
2015
Mar. 1 Cash................................................................................405,333
Quick Study 14-17D (10 minutes)
Rental Expense...............................................................250
Cash (or Payable)..................................................... 250
To record rental expense for car lease.
Quick Study 14-18D (10 minutes)
Quick Study 14-19 (10 minutes)
a. The par value of the 4.625% bond issuance is £ 313 million. The
carrying value is £ 367 million.
Quick Study 14-20 (10 minutes)
a. There is an inverse relation between market rates and bond prices (to
see this, look at the decreasing discount rate as the yield rate increases
in present value tables of Appendix A). Given that the 4.625%
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Chapter 14 - Long-Term Liabilities
b. No, the change in market rates since it issued the bonds does not affect
c. Because the bonds trade at a premium in the market (111.67), it would
pay more to retire the bonds than the balance sheet (par) value. Its cash
d. Vodafone must repay the par amount of the bonds at maturity. Because
this is the only cash flow that the bondholders will receive, the market
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Chapter 14 - Long-Term Liabilities
EXERCISES
Exercise 14-1 (15 minutes)
1. Semiannual cash interest payment = $3,400,000 x 9% x 1/2 = $153,000
2. Journal entries
2015
(a)
Jan. 1 Cash.................................................................................3,400,000
Bonds Payable.......................................................... 3,400,000
Sold bonds at par.
3.
2015
(a)
Jan. 1 Cash*...............................................................................3,332,000
Discount on Bonds Payable..........................................68,000
Bonds Payable.......................................................... 3,400,000
Sold bonds at 98. *($3,400,000 x 0.98)
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