CHAPTER 14
Non-Current Liabilities
LEARNING OBJECTIVES
1. Describe the nature of bonds and indicate the accounting for bond issuances
CHAPTER REVIEW
1. Chapter 14 presents a discussion of the issues related to non-current liabilities. Long-term
debt consists of probable future sacrifices of economic benefits. These sacrifices are
payable in the future, normally beyond one year or operating cycle, whichever is longer.
Bonds Payable
2. (L.O. 1) Long-term debt consists of obligations that are not payable within the operating
cycle or one year, whichever is longer. These obligations normally require a formal agreement
between the parties involved that often includes certain covenants and restrictions for
3. Non-current liabilities include bonds payable, mortgage notes payable, long-term
4. Bonds payable represent an obligation of the issuing corporation to pay a sum of money
5. Bonds are debt instruments of the issuing corporation used by that corporation to borrow
funds from the general public or institutional investors. The use of bonds provides the
6. In order to make a bond more attractive to the investing public it may have any of a
variety of features. The text lists and describes the more common types of features that
7. (L.O. 3) Bonds are issued with a stated (coupon or nominal) rate of interest expressed
as a percentage of the face value of the bonds. When bonds are sold for more than face
8. To compute the effective interest rate of a bond issue, the present value of future cash
flows from interest and principal must be computed. This often takes a financial calculator
or computer to calculate.
9. When a bond sells at a discount, the proceeds received are less than the face value of
the bond, the amount to be repaid at maturity. The difference, or discount, represents
10. The computation of the discount amortization consists of three steps: (a) compute bond
interest expense by multiplying the carrying value of the bond at the beginning of the
11. To illustrate the accounting of a bond sold at a discount, assume Kim Company issued
¥1,000,000 of bonds dated January 1, 2018, with a stated rate of 6%, paid semi-annually,
and maturing on January 1, 2023. The bond sold for ¥918,887 and an effective-interest
rate of 8%. The entry on January 1, 2018 would be:
The entry on July 1, 2018 to record payment of the semi-annual interest would be:
The entry on January 1, 2019 to record payment of the semi-annual interest would be:
12. When a bond sells at a premium, the proceeds received are greater than the face value
of the bond, the amount to be repaid at maturity. The difference, or premium, represents
13. To illustrate the accounting of a bond sold at a premium, assume the Kim Company bond
mentioned in paragraph 11 was sold for ¥1,043,763 and an effective-interest rate of 5%.
The entry on January 1, 2018 would be:
Cash …………………………………………………….. 1,043,763
14. If the interest payment date does not coincide with the financial statement’s date, the
15. When bonds are issued between interest dates, the purchase price is increased by an
amount equal to the interest earned on the bonds since the last interest payment date.
On the next interest payment date, the bondholder receives the entire semiannual interest
payment. However, the amount of interest expense to the issuing corporation is the
16. When bonds are issued between interest payment dates for a discount or premium,
interest expense is computed from the date of sale, not the date of the bonds. This
Long-Term Notes Payable
17. (L.O. 2) The difference between current notes payable and long-term notes payable is
the maturity date. Accounting for notes and bonds is quite similar.
18. Interest-bearing notes are treated the same as bonds⎯a discount or premium is recognized
19. When a debt instrument is exchanged for noncash consideration in a bargained
transaction, the stated rate of interest is presumed fair unless: (a) no interest rate is
20. When an imputed interest rate is used for valuation purposes it will normally be at least
equal to the rate at which the debtor can obtain financing of a similar nature from other
21. Mortgage notes are a common means of financing the acquisition of property, plant, and
equipment in a proprietorship or partnership form of business organization. Normally, the
22. Lenders have partially replaced the traditional fixed-rate mortgage with new and unique
23. (L.O. 3) The extinguishment or payment of non-current liabilities at maturity is a
24. The amount paid to extinguish non-current debt prior to maturity is called the reacquisition
price, and may include a call premium and reacquisition expenses. If the net carrying
25. If extinguishment of non-current debt is accomplished through the exchange of assets
for debt, the debtor has to determine two possible gains or losses. First, the debtor must
26. If extinguishment of non-current debt is accomplished by the creditor accepting shares
of the debtor, the gain or loss from extinguishment is based on a comparison the
27. If extinguishment on non-current debt is accomplished by modification of terms, IFRS
requires that the modification be accounted for as an extinguishment of the old debt and
28. (L.O. 4) The IASB allows companies the option of reporting their non-current liabilities, such
as bonds and notes payable, at their fair value. The IASB believes that fair value provides
29. A significant issue in accounting today is the question of off-balance-sheet financing.
Off-balance-sheet financing is an attempt to borrow monies in such a way that the
30. The IASB response to off-balance-sheet financing arrangements has been increased
disclosure (note) requirements.
31. Companies that have large amounts and numerous issues of long-term debt frequently
report only one amount in the statement of financial position and support this with
32. Long-term creditors and shareholders are interested in a company’s long-run solvency
and the ability to pay interest when it is due. Two ratios that provide information about
debt-paying ability and long-run solvency are the debt to assets ratio and the times
LECTURE OUTLINE
This chapter can be covered in three class sessions. Students are generally familiar with the
accounting for bonds payable from elementary accounting. Some students may be unfamiliar
with the effective-interest method of amortization of bond discount and premium. This chapter
provides an opportunity to apply present value concepts covered in chapter 6.
A. (L.O. 1) Nature of Non-Current Liabilities.
2. Covenants or restrictions, for the protection of both lenders and borrowers, are stated
in the bond indenture or note agreement.
B. Types of Bond Issues. Discuss the different types of bonds such as secured and unsecured
C. Valuation of Bonds. The price of a bond is determined by the interaction between the
bond’s stated (coupon or nominal) interest rate and its market (effective) rate.
1. A bond’s price is equal to the sum of the present value of the principal and the present
value of the periodic interest.
D. Amortization of bond discounts and premiums.
1. The amortization period for premiums or discounts is the period of time that the bonds
are expected to be outstanding.
3. The effective-interest method is the required procedure used to calculate periodic
interest expense. The carrying value of the bonds at the beginning of the period is
multiplied by the effective interest rate to determine the interest expense.
Effective–Interest Method. In teaching this part of the chapter, the following
relationships should be emphasized.
4. Bonds issued between interest dates: investors pay the issuer the purchase price plus
interest accrued from the last interest payment date to the date of issue.
a. Bonds issued at par:
(1) Credit the accrued interest received to Bond Interest Expense.
b. Bonds issued at discount or premium:
(1) Credit the accrued interest received to Bond Interest Expense.
E. (L.O. 2) Long-Term Notes Payable.
1. Accounting procedures for notes and bonds are quite similar. Whenever the face value
2. Notes not issued at face value.
a. Zero Interest-Bearing Notes Issued for Cash:
(1) The implicit interest rate is the rate that equates the cash received (present
b. Interest-Bearing Notes with an Effective Rate Different from the Stated Rate:
(1) If a stated interest rate is unreasonable, an imputed interest rate must be
3. Special notes payable situations.
a. The stated interest rate is presumed to be fair unless.
(1) No interest rate is stated, or
4. Journal entries are similar to entries for bonds payable issued at a discount.
5. Mortgage Notes Payable.
a. A promissory note secured by property.
F. (L.O. 3) Extinguishment of non-current liabilities.
1. The difference between the net carrying amount and the reacquisition price is a gain
or loss.
a. Reacquisition price = price + call premium + reacquisition expenses
2. Refunding is the process of replacing old debt with new debt.
3. Extinguishment of non-current debt through the exchange of assets for debt.
a. The debtor has to determine two possible gains or losses.
b. Gain or loss on extinguishment of debt.
(1) If the carrying value of the debt exceeds the fair value of the assets transferred,
4. Extinguishment of non-current debt by the creditor accepting shares of the debtor.
a. If the carrying value of the debt exceeds the fair value of the shares issued, a gain
5. Extinguishment on non-current debt is accomplished by modification of terms.
a. IFRS requires that the modification be accounted for as an extinguishment of the
old debt and the issuance of new debt, measured at fair value.
G. (L.O. 4) Presentation and Analysis – Fair Value Option
1. IASB allows companies the option of reporting their non-current liabilities, such as
bonds and notes payable, at their fair value.
H. Off-balance-sheet financing: an attempt to borrow in such a way that the obligation is not
recorded.
1. Non-consolidated subsidiary.
IFRS does not require a subsidiary that is less than 50% owned to be included in
the consolidated financial statements.
2. Special purpose entity (SPE).
3. Operating leases.
Lease assets instead of buying them and incurring debt to finance the purchase.
4. Rationale for off-balance-sheet financing.
a. Attempt to “enhance the quality” of the statement of financial position.
I. Presentation of Non-current liabilities:
1. Reported as one amount in the statement of financial position and supported with
comments and schedules in the notes.
5. Analysis of non-current liabilities.
a. Solvency: ability to pay interest and principal on long-term debt as it comes due.