Long-Term Notes
(continued)
At Each of the Six Interest Dates
Skill Graphics (Borrower)
At Maturity
Skill Graphics (Borrower)
T14-11 (continued)
14-22 Intermediate Accounting, 8/e
Note Exchanged for Assets or Services
Occasionally the stated interest rate is not indicative of the
market rate at the time a note is negotiated. The value of the
asset (cash or noncash) or service exchanged for the note
establishes the market rate.
The accounting treatment is the same whether the amount is
T14-12
Note Exchanged for Assets or Services
(continued)
At the Purchase Date (January 1)
Skill Graphics (Buyer / Issuer)
Machinery (cash price) …………………………………… 666,633
At the First Interest Date (June 30)
Skill Graphics (Borrower)
Interest expense (market rate x outstanding bal.) …………. 46,664
T14-12 (continued)
14-24 Intermediate Accounting, 8/e
INSTALLMENT NOTES
Notes often are paid in installments, rather than a single amount
at maturity.
$666,633 ÷ 4.76654 = $139,857
amount (from Table 4) installment
1 139,857 .07 (666,633) = 46,664 93,193 573,440
2 139,857 .07 (573,440) = 40,141 99,716 473,724
T14-13
INSTALLMENT NOTES
(continued)
Skill Graphics (Buyer / Issuer)
Machinery …………………………..……………………. 666,633
Each payment includes both an amount that represents interest
and an amount that represents a reduction of principal.
At the First Interest Date (June 30)
Skill Graphics (Borrower)
Interest expense (market rate x outstanding bal.) ………. 46,664
14-26 Intermediate Accounting, 8/e
FINANCIAL STATEMENT DISCLOSURES
Disclosure requirements include:
• the fair value of all financial instruments
• For all LT liabilities, the aggregate amounts maturing and
sinking fund requirements (if any) for each of the next five
years.
Microsoft’s annual report for the fiscal year ended June 30, 2013
stated:
Maturities of our long-term debt for each of the next five years and
thereafter are as follows:
(In millions)
Year Ending June 30,
2014 $ 3,000
2015 0
EARLY EXTINGUISHMENT
Illustration – On January 1, 2017, Masterwear Industries called
its $700,000, 12% bonds when their book value was $676,290.
T14-15
14-28 Intermediate Accounting, 8/e
FAIR VALUE OPTION
A. A company is not required to, but has the option to, value
some or all of its financial assets and liabilities, including
bonds and notes, at fair value.
Illustration
HSA, Inc. chooses the fair value option for its bonds. Bonds
issued for $180,000 on July 1 were priced at $183,000 on
T14-16
APPENDIX A
BONDS ISSUED BETWEEN INTEREST DATES
All bonds sell at their price plus any interest that has accrued
since the last interest date.
Illustration – On March 1, 2016, Masterwear Industries issued
$700,000 of 12% bonds, dated January 1. Interest of $42,000
is payable semiannually on June 30 and December 31. The
bonds mature in three years. The entire bond issue was
T14-17
14-30 Intermediate Accounting, 8/e
BONDS ISSUED BETWEEN INTEREST DATES
(continued)
The issuer incurs interest expense, and the investor
recognizes interest revenue, for only the four months
the bonds are outstanding.
At the First Interest Date (June 30)
Masterwear (Issuer)
Interest expense (6 mo. – 2 mo. = 4 mo.) ……… 28,000
INTERNATIONAL FINANCIAL REPORTING STANDARDS
Distinction between debt and equity for preferred stock.
Differences in the definitions and requirements under these
standards can result in the same instrument being classified
T14-18
14-32 Intermediate Accounting, 8/e
INTERNATIONAL FINANCIAL REPORTING STANDARDS
Convertible bonds. Under IFRS, convertible debt is
T14-19
APPENDIX B
TROUBLED DEBT RESTRUCTURING
When changing the original terms of a debt agreement is
motivated by financial difficulties experienced by the debtor
T14-20
14-34 Intermediate Accounting, 8/e
DEBT IS SETTLED
Illustration – First Prudent Bank agrees to settle Brillard’s $30
million debt in exchange for property having a fair market value
of $20 million. The book value of the property on Brillard’s
books is $17 million
($ in millions)
Land ($20 million minus $17 million) …………………….. 3
DEBT CONTINUED, WITH MODIFIED TERMS:
WHEN TOTAL CASH PAYMENTS ARE
LESS THAN THE BOOK VALUE OF THE DEBT
Illustration – Brillard Properties owes First Prudent Bank $30
million, under a 10% note with 2 years remaining to maturity.
Due to financial difficulties of the developer, the previous year’s
interest ($3 million) was not paid. First Prudent Bank agrees to:
(1) forgive the interest accrued from last year,
(2) reduce the remaining two interest payments to $2 million
each,
(3) reduce the principal to $25 million.
Analysis:
Book value: $30 million + 3 million = $33 million
Future payments: ($2 million x 2) + $25 million = 29 million
Gain $ 4 million
($ in millions)
T14-22